Paramount and Viacom Appear Set for Merger

By KATHRYN HARRIS and JOHN LIPPMAN

Sept. 11, 1993 12 AM PT

TIMES STAFF WRITERS

In what would be the biggest media industry merger ever, the chairmen of Paramount Communications Inc. and Viacom Inc. agreed on a $16.5-billion merger plan that will be presented Sunday for approval by directors of the two companies, reliable sources told The Times on Friday.

If completed, the merger would signal the passing of the last of Hollywood’s major studios to a new generation of corporate leaders. But in its place would emerge an entertainment colossus well positioned to take advantage of the emerging interactive and high-technology marketplace where traditional entertainment, like film and television, is combining with computers and telephony.

Paramount is best known as the parent company of a venerable film and television studio--the producer of such movies as “The Firm” and “Indecent Proposal” and the TV hit “Cheers”--as well as owner of the Simon & Schuster publishing house. Cable TV and programming company Viacom owns the highly profitable MTV, VH-1 and Nickelodeon networks, as well as the Showtime movie channel.

The merged company likely would be christened Paramount Viacom International, one source said, putting the best-known name first, in the same way Time Warner Inc. did in its $14-billion merger in 1989. With revenues exceeding $6 billion a year, Paramount Viacom would rank as the fifth-largest media company in the world behind Time Warner, Rupert Murdoch’s News Corp., Germany’s Bertelsmann AG and the Walt Disney Co.

Viacom--the company formed 22 years ago by a spinoff of CBS’ old television programs and cable TV systems--will in effect be the acquiring company, leaving its indomitable chairman, Sumner M. Redstone, firmly in control of the merged company with nearly 40% of the stock, knowledgeable executives said.

Although the actual terms were not disclosed, the deal is expected to involve two classes of stock as well as cash. At current market prices, the combined companies have a total market value exceeding $16.5 billion.

No official confirmation came from either company, but speculation drove up prices for the stock of both firms Friday. Paramount rose $4.25 to $61.125, with nearly 2.1 million shares changing hands, making it the 10th-most active stock Friday on the New York Stock Exchange. Viacom--with two classes of shares trading on the American Stock Exchange--saw its Class A (voting shares) rise 37.5 cents to $66.375, while Class B (non-voting) closed at $59.375, up 75 cents.

In a fervor reminiscent of the ‘80s, some investors were already wagering that another bidder would emerge for New York-based Paramount, which, unlike Viacom, has no controlling shareholder and seems to have put itself on the auction block. The most frequently mentioned bidder is Barry Diller, who ran the Paramount studio for 10 years and now heads QVC Network, the home shopping venture closely allied with cable television mogul John Malone.

But Diller presently is caught up in a complicated merger with Home Shopping Network, which would make an unfriendly bid extremely difficult to launch, sources said. He nearly made a move on Paramount in July, one source added, but felt he had to deal with his core retail business first.

Paramount Chairman Martin S. Davis no doubt was aware of Diller’s interest, industry executives said, which might explain Davis’ willingness to negotiate a deal with Viacom after four years of intermittent talks.

Wall Street and Hollywood found some irony Friday in the notion that Paramount might find itself under siege as a victim of the same kind of tactics it used in an unfriendly bid for Time Inc. in 1989, when Paramount tried to break up the Time Warner merger. Paramount ultimately lost its bid for Time in the Delaware courts, but only after Time dropped its plan for a stock-swap and instead took on billions of dollars of debt to acquire Warner Communications Inc. outright.

Paramount itself was one of the first studios to be gobbled up by a conglomerate, acquired in 1966 by Gulf & Western Industries. The name was changed to Paramount Communications Inc. in 1989, the year Davis vowed to find a merger partner to make Paramount one of the entertainment giants.

All the major movie studios have undergone fundamental management shifts since 1984. Disney installed a new management team under pressure from an investment group led by the Bass Family of Texas. And every other major studio has changed hands. Three of the major studios--Universal, Columbia and Twentieth Century Fox--are now owned by foreign-based companies.

Analysts said Paramount and Viacom have especially complementary assets. The merger will help feed Viacom’s program-hungry cable TV networks, like MTV and Showtime, in addition to giving Paramount’s films and TV programs a valuable new distribution outlet.

In addition to movies, Paramount is one of Hollywood’s most successful TV producers, with such hit shows as “Star Trek: The Next Generation” and “Entertainment Tonight.” “Cheers,” which went off NBC this year after 11 seasons, will continue to generate tens of millions in syndication profits in the coming years.

One analyst said Paramount’s film and TV studio generate between $250 million to $300 million each year in pretax cash flow. In addition, Paramount’s Simon & Schuster division generates about $200 million annually.

Unlike Paramount, however, with its lucrative but mature entertainment and publishing businesses, New York-based Viacom is poised for accelerated growth due to the rapid globalization of its cable TV networks. The music video and children’s programming channels are at the forefront of the satellite and cable TV revolution around the world.

This year MTV, VH-1 and Nickelodeon are estimated to generate more than $250 million in operating cash flow, according to investment bank Morgan Stanley. MTV International, which includes MTV Europe and the recent entry of MTV into Asia, will generate about $10 million but is expected to grow at an annual rate of more than 25% over the next several years.

Next year, MTV will expand into Latin America, and Nickelodeon and VH-1 will be introduced in Britain.

Viacom’s 1.1 million cable TV subscribers are expected to provide another $187 million in operating cash flow this year. Other major sources of income include the company’s five TV and 14 radio stations, as well as Showtime and its entertainment division, which earns syndication profits from “The Cosby Show” and “Roseanne.”

Even more than Paramount, however, Viacom has been moving aggressively into the still uncharted waters of interactive television. Viacom’s prototype cable TV system in the San Francisco suburb of Castro Valley is about to launch a high-tech, interactive service that will allow home viewers to shop, pay bills or watch a movie or TV show on demand.

* RELATED STORY: D1

The Companies at a Glance

The merger of Paramount Communications and Viacom International would create the fifth-largest entertainment company in the world. Here’s the rundown of their assets:

Paramount

* 1992 revenue: $4.3 billion

* 1992 profit: $261.4 million

Holdings:

Paramount Pictures, including

Paramount Studios

Paramount Video

Paramount Television

Wilshire Court Productions

Paramount Stations Group, owns four Fox TV affiliates and three independent UHF stations

USA Network (co-owned with MCA Inc.), including the Sci-Fi Channel

Paramount Famous Music