Is Paramount Barry's Baby Now?

Never underestimate John C. Malone's ability to make a complex situation even more byzantine. By striking a deal with Bell Atlantic Corp., the chief executive of Tele-Communications Inc. has dramatically recast the weeks-long battle for Paramount Communications Inc. The noisy fray almost surely will grow louder. But now, some believe that QVC Network Inc., the horse Malone is backing, has a better chance of prevailing.

The battle certainly has a way to go. Bell Atlantic's dramatic entry gives rival Viacom Inc., the original Paramount bidder, new material for its argument that QVC's bid raises insurmountable regulatory concerns for Paramount's board. But by allying TCI with a cash-rich regional phone company, Malone has given QVC Chairman Barry Diller enormous financial leverage. That edge could grow: Within days, say sources close to the company, QVC is expected to announce yet another investment partner--likely BellSouth or Cox Enterprises--adding $1 billion to its war chest.

OFF GUARD. Bell Atlantic may want Diller to win Paramount almost as much as Diller does. Publicly, Chairman Raymond W. Smith is cautious: "I support John, who supports QVC." But Bell Atlantic, like the other Baby Bells and cable companies that are massing outside Paramount's door, covets the studio's library of 900 films and the educational material in its Simon & Schuster Inc. publishing unit. Insiders say Bell Atlantic held separate talks with Diller about supporting his bid for Paramount, even offering nearly $2 billion for a 25% stake in QVC. The company also met with Viacom, which later won a $1.2 billion investment from Nynex Corp.

What now for Diller? Sources close to the deal say he was caught off guard by Malone's talks with Bell Atlantic and was told about it only two days before it was publicly announced. Nonetheless, "Diller is a more important part of the [Paramount] equation now," says John Tinker, a media analyst at Furman Selz Inc. Malone, who only last week agreed to reunite TCI with QVC partner Liberty Media Corp. in a $3.5 billion stock swap, says he's strongly committed to the bid: "Only Barry Diller could make Paramount worth the prices now being offered for it," Malone says.

That's the argument Diller and company will make soon to Paramount board members, who agreed on Oct. 11 to begin "informational discussions with QVC in order to evaluate various aspects of its proposal." They also must soothe would-be investors. In the hours after the Bell Atlantic merger was announced, Diller and Herbert A. Allen, QVC's investment banker, worked the phones to assure BellSouth, Cox, and other potential partners that TCI wasn't pulling out. The two also are said to have stressed that QVC's board would be restructured to ensure that Malone would not exert undue influence over Paramount decisions if QVC won the contest.

So far, knocking Malone's prospective role in a QVC-Paramount deal has been Viacom's major defense against Diller. The company has already filed an antitrust suit against TCI and Malone. Viacom Chairman Sumner M. Redstone and Paramount Chairman Martin S. Davis have been making the rounds in Washington to argue that Malone's strong presence in both cable systems and programming gives him a near-monopoly in many markets. With Bell Atlantic, they likely will add, Malone's reach would now cover a huge percentage of the country. Davis himself has much to lose: If Diller wins, he's likely to waste little time casting his old boss and enemy out of the corner office.

TCI could still be forced to exit QVC's Paramount bid by selling its stake in the home-shopping channel if the regulatory spotlight on TCI becomes too intense. And even if the two companies eventually win regulatory and antitrust approval for their combination, the likely delay could hobble QVC. Regulatory uncertainties could undermine QVC's lofty stock price, which provides the financial basis for two-thirds of its bid. "Clearly that's what Sumner is hoping will happen," says one observer.

Still, in the end, Redstone may be the one who walks away. Although it is widely expected that Viacom will sweeten its bid in the next few days--most likely upping the overall value to within striking distance of QVC's $9.6 billion bid--Redstone could win big by folding. His Sept. 12 agreement with Paramount could earn Viacom hundreds of millions if its deal falls through. For all the hoopla surrounding the TCI-Bell Atlantic deal, this bidding war may boil down to which side decides that the bidding has gotten too rich.