MCA, Viacom End Talks Over USA Network

MCA Inc. and Viacom Inc. terminated settlement talks Friday over the control of USA Network and will head back to Delaware Chancery Court on Monday to resolve their legal dispute.

Neither party provided details on why negotiations broke down, but sources close to the situation said tax issues could not be resolved.

After five days in court, the trial was postponed last Monday so the parties could negotiate a settlement. Under its terms, Viacom would have paid $1.45 billion to MCA for complete control of USA, which is now owned in a 50-50 partnership. In addition, MCA would have gained control of the Sci-Fi Channel, which is part of the partnership.

But MCA would have to pay a huge capital gains tax on the sale of its half-ownership of USA to Viacom because the cable channel is worth so much more now than it was when the partnership was formed 15 years ago. A way to minimize or share the tax apparently could not be agreed upon.

MCA filed a lawsuit against Viacom in April, charging that its launch of a new channel called TV Land violated the terms of the partnership agreement. Under the pact, neither party can start a new network without triggering a buyout option in the partnership.

MCA claims it deserves a stake in TV Land as well as in Viacom’s MTV Networks, which are the fastest-growing segment of the company. Viacom has claimed that TV Land is a spinoff of Nickelodeon rather than a new network.

Because MCA had sued seeking to force Viacom to sell its 50% in USA, analysts were surprised when Viacom emerged as the buyer. MCA needs the cable outlets for its movies and television shows more than Viacom. Unlike major competing studios, MCA owns no broadcast network, and its only cable interest is the USA partnership.

Viacom had hoped to wring cost savings and advertising gains from combining USA with its other cable channels, which include MTV, Nickelodeon and VH-1.

When Viacom proposed paying an unusually generous price--a multiple of 16 times cash flow--earlier this week, its bond prices fell. Investors interpreted the offer as a signal that Viacom would be putting less capital toward debt reduction.

Some television executives read the offer as indicating that Viacom Chairman Sumner Redstone was not confident about winning the case in court.

The companies announced that talks had been terminated shortly before the stock market closed in New York. Viacom stock closed down 62.50 cents at $31.50 on the American Stock Exchange; MCA’s parent Seagram Co. dropped 50 cents to $36 on the New York Stock Exchange.