The Paramount Bout: Both Sides Could Take It On The Chin

Investor Mario Gabelli likens the takeover battle for Paramount Communications Inc. to a colossal corporate baseball game. Now, says Gabelli, the contest has been halted in the ninth inning by "debris on the field." He's talking about a lot more than beer cups and hot-dog wrappers.

On Nov. 24, a Delaware Chancery Court threw out key provisions of Viacom Inc.'s original merger deal with Paramount that would have given the company an edge over rival bidder QVC Network Inc. Rebuking Paramount Chairman Martin S. Davis and his investment bankers at Lazard Fr eres & Co., Vice-Chancellor Jack Jacobs ruled that they didn't properly assess QVC's offer, which now stands at roughly $380 million more than Viacom's bid.

Davis and Lazard aren't the only ones who may come out smarting. As Paramount and Viacom scramble to appeal the ruling in Delaware Supreme Court, media experts say the duel could damage both Viacom's Sumner M. Redstone and QVC's Barry Diller. Measured by its impact on reputations and future opportunities, this battle could be as costly to the loser as to the winner. Says one leading media investment banker: "Both companies have irrevocably changed their destinies by going into this deal."

GREAT EXPECTATIONS. Who has more to lose? Media analysts and rival executives differ sharply. But on balance, Diller may face the tougher comeback if his bid for Paramount fails. That's because investors bid up QVC's stock on the expectation that the creator of Fox Broadcasting Co. would do similarly great things with his home-shopping network. True, his stock will get a short-term boost if Diller doesn't have to ante up $10.2 billion. But longer term, says Porter Bibb, an investment banker at Ladenburg, Thalmann & Co., "QVC's stock is a promotion, and it will be deflated if QVC boils down to a home-shopping network."

No question, home shopping is still a vibrant business. QVC's operating income jumped 26% in the first nine months of 1993, to $99.1 million, on revenues of $849.6 million. Yet several executives familiar with QVC wonder whether Diller has developed enough of a feel for retailing to broaden his franchise. In a Dec. 1 announcement, QVC trumpeted its new, upscale Q2 channel as the first of a series of market-segmented channels. But observers note that Diller has recruited programmers rather than home-shopping veterans to start up Q2. One result, they say, is that the channel is struggling to find vendors. Q2 President Candice Carpenter says she has already lined up Nike Inc. and other companies.

What's more, Diller may have lost his most obvious avenue of growth: He probably won't be able to rekindle merger talks with archrival Home Shopping Network Inc. Executives close to Diller insist that a merger could still happen. The trouble is, HSN is controlled by one of Diller's key shareholders, John C. Malone. And Viacom's Redstone has turned Malone into a lightning rod for federal regulators by filing an antitrust suit against him and QVC. "One thing Redstone has probably done is to separate Malone and Diller," says Peter Siris, a retailing analyst at UBS Securities Inc.

"UNFORGIVABLE." The same issue could dog Diller if he decides to bid for another entertainment company, as many observers expect he would. Among the possible targets: Matsushita Electric Industrial's MCA or Sony's Columbia Pictures. But even if they wanted to sell, Diller might end up competing with Malone. Indeed, Malone, who runs Tele-Communications Inc., has already talked to both about buying an equity stake.

If Redstone has complicated Diller's plans, he has hardly made his own life easier. In suing Malone, cable TV's preeminent executive, on the tender issue of antitrust, Viacom has alienated many people in the industry. "It's one thing for outsiders to bash cable," says a rival executive, "but when someone inside the industry does it, that's unforgivable."

Even after the dust settles, Redstone will probably get a cool reception from his cable peers. That won't matter much to Viacom's established cable networks, MTV and Nickelodeon. But rival executives say cable operators may shun new ventures, such as spin-off channels of MTV. And they could rally behind competing services, such as a music-video and home-shopping channel announced by TCI and Bertelsmann.

Redstone would certainly be in a better position to mend fences if he controlled a goliath such as Paramount Viacom. That may explain why most observers expect the bidding for Paramount to go another round, regardless of how the Delaware court rules. Diller and Redstone may have different motives: One sees the deal as the key to making his reputation; the other, as a capstone to his career. But on this point, they seem to agree: The price of failure will be more than a bruised ego.

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