After a week of speculation about how he might pull together the money to win Paramount Communications Inc. in a fierce bidding war, Sumner M. Redstone, the chairman of Viacom Inc., submitted an offer yesterday that on the surface seemed stunning.
Trying desperately to beat a rival bid from QVC Network Inc., Viacom offered $105 a share in cash for 50.1 percent of Paramount's stock, with the rest to be purchased with Viacom stock. And in a companion move, he said Viacom would merge with the Blockbuster Entertainment Corporation, the giant video-rental company that has backed his bid for Paramount, in an exchange of stock worth $8.4 billion.
Before the merger is completed, Blockbuster will buy Viacom stock worth $1.25 billion, giving Mr. Redstone, who controls Viacom, the cash he needs to raise his Paramount bid.
Questions About Bid
Despite considerable fanfare on Wall Street over the moves, financial analysts and traders quickly disparaged Viacom's bid. Because of the value of the stock portion of the offer, they pegged Viacom's bid at about $78 in cash and stock for each share of Paramount. That would be less than QVC's offer of about $83 a share, which Paramount's board has approved. By any measure, Viacom's return shows how intense the takeover battle has become. No media company can be certain of how entertainment programming will be distributed in the future, but all of them are aware of the need to have films and television series, like those that Paramount owns and produces, to attract viewers.
"It's a soap opera," said William LeFevre, an analyst at Ehrenkrantz King & Nussbaum, an investment firm in New York. "It's just going to go on and on."
MTV and Movie Rentals
Indeed, even if Viacom fails to win Paramount, it said it would still merge with Blockbuster to create a media company with holdings including MTV: Music Television, the Nickelodeon and Nick at Nite cable channels, broadcast television programming and 3,600 video-rental stores across the country. Blockbuster sees Viacom as a way to expand out of home video, whose long-term prospects are tenuous as more and more programming is sent to homes electronically.
Under the rules of the bidding process set up by Paramount in response to a ruling last month by the Delaware Supreme Court, Viacom had until yesterday to raise its offer before Paramount shareholders sold their shares to QVC, the home-shopping network. Paramount said yesterday that its board would meet next week to consider Viacom's revised proposal.
Many analysts on Wall Street were not happy with Viacom's latest offer. "To induce me to sell Mr. Redstone my stock, he will have to offer more total value," said a trader who owns Paramount stock that he said he had agreed to sell to QVC.
Several traders said Mr. Redstone, 70, seemed to be hoping that shareholders would focus on the $105 a share for 50.1 percent of the shares, instead of on the combined value of the stock and the cash in the bid.
Gordon Crawford, a senior vice president of the Capital Research Company, a big shareholder in Paramount, Viacom, QVC and Blockbuster, was among those critical of the new offer. He said, "To go to all the trouble of merging two companies, causing the value of both stocks to decline sharply when trading opens Monday, just to launch a bid that is clearly inferior to the existing QVC bid, seems like an exercise in futility."
The Viacom bid was announced after the stock market closed yesterday, but rumors of a Viacom-Blockbuster union had been circulating for some time. Viacom's class B shares closed at $41, down $1.75, while Paramount stock closed at $79.25, up 75 cents. QVC's shares jumped $1.125 to $40.625, and Blockbuster stock fell $1.625 to $28.25.
QVC Chairman's Response
Even as Mr. Redstone and the chairman of Blockbuster Entertainment, H. Wayne Huizenga, were fielding calls from Wall Street investors yesterday, QVC's chairman, Barry Diller, said he thought the Paramount board should accept QVC's tender offer, which was scheduled to close last night, and which he noted was higher than Viacom's. Mr. Diller was speaking by phone from the offices of QVC's law firm, Wachtell Lipton Rosen & Katz.
The Paramount board had agreed to accept QVC's bid if 50.1 percent of Paramount's shareholders tendered their stock to QVC by last night, unless Viacom made a higher offer.
But with news of the new bid, many investors held their stock back from QVC, assuming they had more time to make a decision. A person close to QVC said late yesterday that Viacom confused the market by announcing a bid at the 11th hour and trying to convince people that Viacom's new offer was higher than QVC's.
Under the terms of its new offer, Viacom's total cash investment is $6.3 billion, or about $700 million more than the cash portion of QVC's most recent bid.
But Viacom has raised its offer from $85 a share in cash for 51 percent of the company, or a cash investment of about $5.2 billion, to $6.3 billion. Traders did not simply focus on the cash portion yesterday, however, since about 49 percent of the offer is in stock.
Creating a New Company
The merger will create a new company to be called Viacom-Blockbuster Inc. The core business of Blockbuster, based in Fort Lauderdale, Fla., is the rental of films on videocassettes, a business that is seen as highly vulnerable to the technical flexibility of interactive information systems, which would let people get the programming they wanted at home, any time they wanted.
Despite Blockbuster's current economic health -- it generates hundreds of millions of dollars annually -- Mr. Huizenga is well aware that it needs to expand into businesses with a more secure future. There is some logic, therefore, to a merger.
But Mr. Crawford and several other analysts wondered whether Viacom would do well to invest so heavily in such a tenuous business. It has agreed to acquire Blockbuster's stock for about $31 a share in Viacom stock, a 10 percent premium over its trading value.
While Viacom and Blockbuster promoted the values of their merger proposal yesterday, because it would allow cost savings in various television businesses, they admitted that the talks heated up only before Christmas, just after QVC raised its bid to its current level.
The news of a merger surprised some entertainment industry executives because Mr. Redstone had said he would not give up control of his company, of which he controls 85 percent of the voting stock.
He kept his word. Mr. Redstone will end up with about 61 percent of the vote in the new company, while Blockbuster and the public will hold the balance.
Mr. Huizenga is selling control of his company to Mr. Redstone without actually putting the company on the block, and Mr. Crawford wondered last night whether Blockbuster had the legal right to do so. He said Paramount had been reprimanded by the Delaware Supreme Court for taking a similar course, selling out to Viacom without giving other companies a fair chance to bid. Blockbuster officials could not be reached for comment last night.
