Paramount Raises Its Ante

By John Greenwald

It was the sultry first Friday of summer, and office workers in Manhattan were streaming out of the city to start their weekend. Not so at the headquarters of Paramount Communications, formerly Gulf & Western, where the company's 14-member board of directors was making a high-stakes decision. Just 30 minutes after trading closed on the New York Stock Exchange, Paramount announced that it was increasing its hostile bid for Time Inc. from $175 a share to $200, thus raising its total offer from $10.7 billion to more than $12 billion.

The move was calculated to turn up the heat on Time, which had rejected Paramount's initial bid two weeks ago and instead pressed ahead with its planned merger with Warner Communications. To that end, Time and Warner on June 16 converted their original debt-free stock swap into a leveraged takeover bid in which Time would buy Warner for a total of up to $14 billion in cash and securities, a step that, among other things, eliminated the need for the deal to be approved by Time stockholders.

In a letter last week announcing the upgraded offer to Richard Munro, chairman of Time, Paramount Chairman Martin Davis said he hoped "that your board and management will now discontinue your efforts to preclude stockholder choice and give Time's shareholders an opportunity to consider our offer." Time promised to consider the new bid "in due course" and advised its stockholders "not to act on the offer until they hear from Time."

The $200-a-share offer is certain to be welcomed by money managers and shareholders who had chafed at Time's rejection of the original Paramount bid. Said Paul Kagan, head of Paul Kagan Associates, a California-based firm that follows the media industry: "It will be very hard for management to tell stockholders that they can't have the $200. This is a large price for Time stockholders who have waited a long while for prices to approximate the real value of their stock." Time shares closed Friday at 165 7/8, up 10 1/2 for the day, in response to leaked reports of the new Paramount bid.

Some experts viewed the Paramount tactic as a move to buttress its position in Delaware chancery court, where Paramount contends that Time is in effect interfering with its shareholders' desire to tender their stock. "This will add a notch to Paramount's legal argument, but it will only put pressure on Time if 70% to 90% of its shareholders tender their stock to Paramount," said Jeffrey Greenblatt, a partner in Cambridge Capital Holdings. "Time does not have to take any new defensive steps," he added, "because there is no threat that Paramount will be able to acquire Time's stock" in the next few months.

If Paramount were in fact successful, the deal would leave it with a heavy debt burden. Although Davis has vowed he would not dismember Time after an acquisition, the pressure to sell assets might grow in response to the need to make large interest payments. In raising the stakes, Paramount acknowledged that its takeover proposal is conditional to, among other things, Time calling off its acquisition of Warner and rescinding the share exchange already executed and on Paramount's ability to obtain adequate financing. To cover the cost of acquiring Time's stock and meet merger-related expenses, Paramount said it expects to secure $14 billion in bank loans and raise $1.6 billion through the sale of high-interest junk bonds.

The latest bid capped a week in which lawyers for Paramount and Time squared off for crucial courtroom contests. Responding to an action Time brought against Paramount on June 16 in federal court in New York City, Paramount filed a counterclaim accusing Time of failing to disclose certain facts about the merger. For example, in reply to Time's charges that questioned the integrity of Paramount's management, Paramount alleged that Time had not informed its shareholders that Steven Ross, chairman of Warner, would receive $180 million under a long-term contract following a merger of the two companies. (Ross would take on the position of co-chief executive for five years in the newly formed company.) Paramount also cited a 1982 case in which an assistant treasurer of Warner was convicted of racketeering, perjury and mail fraud in connection with a kickback scheme involving a movie theater. No charges were brought against Ross in the matter. Ross called the counterclaim an "act of desperation."

The most crucial events may play out in the Delaware court, where Judge William Allen will begin hearings on July 11 on Paramount's challenge to Time's rejection of the hostile bid. His ultimate decision could be the turning point in the great media battle.

With reporting by Thomas McCarroll/New York