Paramount: Do I Hear $11 Billion?

It was a fine display of corporate synergy, to be sure. A converted cafeteria at Viacom's Manhattan headquarters brimmed Oct. 25 with physical testament to Viacom's new $10 billion bid for Paramount Communications Inc. Star Trek figurines mixed it up with Ren & Stimpy jackets. An eight-minute video plugged Viacom's MTV Networks and Paramount's New York Knicks basketball team, to the lilting strains of a specially penned rock song: "Don't you know the urge? Merge, merge, merge."

No, it wasn't an especially good song. And the rhetoric, too, is wearing thin. Viacom Chairman Sumner M. Redstone, even more ebullient than usual, told reporters: "This merger is not about two plus two equaling four, but six, or eight, or ten." But after two months of talk about strategic fit and shareholder value, it has become clear that the battle for Paramount has little to do with either: "In the end, it's usually about money--who's offering the most and the timing of when it's offered," says Herbert A. Allen, the investment banker who is advising QVC Chairman Barry Diller.

WORTH WHAT? Indeed, within days of each other, QVC and Viacom have put new bids on the table that dramatically raise the cash stakes: Both are offering to pay roughly $80 cash a share for 51% of Paramount's stock, exchanging stock for the rest. And while Allen won't disclose Diller's next move, other sources involved in the bidding indicate that QVC soon will take its offer up a notch.

What's Paramount worth? The personal feud that has emerged between Diller and Redstone may have obscured the hard numbers. But an $80-a-share bid comes to roughly 21 times Paramount's cash flow, figures S.G. Warburg & Co. Vice-President Lisbeth R. Barron--substantially more than the 16 times cash flow Matsushita Electric Industrial Inc. paid for MCA Inc. in 1990. With the allure of a 500-channel world brightening Paramount's asset base, Barron figures the company could fetch up to 23 times cash flow--putting Paramount's price tag at nearly $90 a share, or roughly $11 billion. Some Wall Street analysts speculate that the company could be worth up to $100 a share.

Paramount's largest stockholders are clearly anticipating yet another round of bidding. After talking with both the Redstone and Diller camps, Mario Gabelli and Capital Group's Gordon Crawford, Paramount's two largest investors (table), are said to be looking for higher offers before committing.

So are others. "Basically, what it comes down to is getting the best absolute dollar value," says Brad Nelson, an analyst at IDS Financial Corp. Adds DeWitt Bowman, chief investment officer at giant CalPERS: "I don't believe all of this stuff about synergy anyway. I'd just as soon take the money and let them worry about the future of Paramount."

Indeed, neither QVC nor Viacom appears to have won major converts to its cause. Few investors have bought into Viacom's vision of Paramount making films that feature MTV characters like Beavis and Butthead and new cable channels that feed from Paramount's library of 1,800 films and 6,100 television programs. Just the same, not many stockholders are lining up behind the less specific plans laid out by Diller.

DILLER OF AN OFFER. For now, investors appear to be leaning ever so slightly toward Viacom, which has board support and has passed key tests put forth by federal regulators. To underscore its determination to grow aggressively--and to do it with Viacom--Paramount on Oct. 26 announced a joint venture with Chris-Craft Industries Inc. to create a fifth TV network, linking Paramount's four independent TV stations with six controlled by Chris-Craft.

The next announcement is likely to come from Diller. He has until Nov. 21, when Viacom's offer expires, to raise his bid, though he may do so by early November. He has ruled out an all-cash bid, says an insider, and feels he has enough cash to substantially boost his bid without taking on new partners. Earlier talks with BellSouth are on hold, says this insider, "but if we need to find more partners to increase eur bid we know where to find them."

Redstone has left the door open to future equity partners, as well. He'll likely find some: In this battle, hunting down other peoples' money hasn't been much of a problem. Actually spending it to do the deal is proving more difficult.

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