Viacom Suggests Auctioning Off USA to Settle Dispute

Viacom Inc. on Monday proposed auctioning off USA Network to the highest bidder to resolve a yearlong legal dispute with its partner in the cable channel, Universal Studios Inc.

The move is Viacom’s latest attempt to salvage its investment in USA Network, one of the most widely watched cable channels, after a judge ruled it breached its contract with Universal.

In a competing proposal Monday, Universal repeated its assertion that Viacom should be enjoined from operating cable networks outside of the partnership. Universal claims its agreement with Viacom prevents its partner from operating competing cable channels, including MTV, VH-1, Nickelodeon and TV Land.

In the wake of their failure to reach agreement, Delaware Chancery Court Vice Chancellor Myron Steele will now determine the fate of USA Network and its sister service, the upstart Sci-Fi Channel.

In May, Steele ordered an end to the joint venture after finding in favor of Universal that Viacom had breached their agreement barring it from owning competing channels. He ordered both sides to submit proposals for dissolving or restructuring the partnership by July 11.

Talks between Viacom and Universal to settle the dispute quickly broke down.

In its filing Monday, Viacom said that Universal rejected a recent offer to buy out Universal at a premium of $1.9 billion, and that Universal turned down a proposal to auction off the partnership to the highest bidder.

Universal, which was formerly known as MCA Inc., says it rejected Viacom’s proposal to auction off USA because such a remedy would turn its “victory at trial into a Pyrrhic one.”

“Despite having been found to be an entirely innocent party whose partner breached its clear contractual and fiduciary duties, MCA would face the risk of losing control of a prized asset against its will,” Universal said in its filing.

MCA was recently renamed Universal Studios--for its legendary studio and theme parks--by its new owner, Seagram Co.

Some analysts speculate that Viacom’s $1.9-billion bid was a legal maneuver to inflate the value of USA Network so Viacom would get the highest price if it was forced to sell its share by the court.

In an attempt to reach an out-of-court settlement last fall, Viacom and Universal agreed on a much lower price of $1.45 billion. But that deal fell through after Viacom’s stock plunged because of investor worries that Viacom Chairman Sumner Redstone was reneging on his promise to pay down his heavy debt. Redstone has vowed not to make any major acquisitions.

For its part, Universal needs USA more than Viacom does. Wall Street was disappointed when Universal agreed to sell USA Network because of its weakness in distribution. Unlike other studios, which own broadcast networks, TV stations or cable services, Universal owns only a 50% interest in USA Network.