A Blockbuster Deal for Beavis and Butt-Head

By THOMAS McCARROLL

Sumner Redstone, a man who does not easily toss in his cards, was determined not to be shunted aside in the bidding war for Paramount Communications last week. As the clock ticked down toward a Friday-midnight deadline for new bids, Wall Street was wondering whether Viacom Inc.'s chairman would be able to pull a last-minute rabbit out of his hat. Unknown to most analysts and investors, a team of investment advisers and lawyers was secretly huddled at the Ritz Carlton hotel in New York City negotiating a blockbuster of a deal that would help Viacom beat the rival bid of Barry Diller's QVC Network.

Redstone was holed up in hush-hush meetings with H. Wayne Huizenga, the chairman of Blockbuster Entertainment, and his team of top advisers. Fueled by pizza and Chinese food, the bleary-eyed negotiators hid out in the hotel suite for two days, often sleeping in chairs, as they hammered out the final details of the deal. So obsessed was Redstone with secrecy that when he arranged a board meeting, directors weren't told where they would assemble until the last minute. With only hours to spare, Viacom and Blockbuster announced a shocker: an $8.4 billion merger that would create a multimedia powerhouse with assets ranging from Viacom's MTV (home of Beavis and Butt-head) and Nickelodeon to Blockbuster's 3,500 retail stores.

The merger also gave Redstone extra cash, which he had been desperately seeking, to use in the battle for control of Paramount. Reinforced by Blockbuster's huge cash hoard and rock-solid balance sheets, he immediately upped his offer for Paramount by $1.2 billion. "It may not be the knockout blow," said an obviously pleased Redstone, "but from our standpoint it is an extremely dramatic coup." Both Redstone and Huizenga insisted that the merger had been in the works for months and would go forward whether or not the company gained control of Paramount.

Dramatic it was, beyond doubt. But a coup? Even as Redstone and Huizenga ( were basking in the glow of their new partnership, Wall Street was scratching its head in amazement at both the merger and the apparent meagerness of the new offer. After two weeks of furious negotiations and consultations with a team of investment bankers from Morgan Stanley, Redstone had produced a bid that was considered by many analysts to be not only anticlimactic but also inferior to Diller's current offer. Though the offer is a complex blend of stock and cash, the estimated value of the Viacom-Blockbuster package is around $79 for each share of Paramount stock, in contrast to QVC's $82 a share. The main difference between the two bids -- and what Redstone is counting on to make his offer more attractive -- is that Redstone's package contains slightly more cash than stock.

It was unclear why someone with Redstone's acumen had labored to produce such a tentative bid. Diller thought so little of Redstone's counter that he vowed QVC would simply stand pat, which was tantamount to a claim of victory. Nor was it clear why Huizenga, whose extraordinarily successful Blockbuster has been on a prodigious buying spree of its own for the past year, would cede control of his own company. Huizenga, a clever and willful entrepreneur who had built the company into not only the largest retailer of home videos and Hollywood's largest single customer but also the majority owner of Spelling Entertainment, Republic Pictures and the Florida Marlins baseball team, mystified analysts by agreeing to be the merged company's vice chairman. This left Redstone squarely in control and Redstone's man Frank Biondi as the chief executive officer.

When asked what he was getting out of the deal, Huizenga said, "While it may not be a great victory for me, it's a very, very great victory for the Blockbuster shareholders." From Huizenga's point of view, the Viacom deal may be more a question of corporate survival than personal ego. Although he maintains that emerging interactive television will not hurt his video business, analysts say the new technology poses a serious threat to Blockbuster's future. "Why else would Huizenga practically give away the store?" asks Jessica Reif, an analyst at Oppenheimer & Co. "He's giving up hard, cold cash for stock, and he's accepting a smaller post in a much bigger company." Says Jeffrey Logsdon, who follows the company for Seidler Amdec: "This is an exit strategy for Huizenga. He gets to unload a declining business before it falls off the cliff."

* Despite the questions swirling around the merger, the new offer is enough to prolong the contentious five-month battle for control of Paramount and cast renewed uncertainty over its outcome. With his latest parry -- even if it turns out to be as ineffectual as Diller thinks it is -- Redstone has for the moment denied QVC's chairman the prize he so eagerly desires. Diller, Redstone and Paramount CEO Martin Davis have been locked in combat since September, when Viacom agreed to buy the movie studio for $8.2 billion in a friendly deal. Soon after that agreement, Diller launched a $9.5 billion hostile takeover. In the bidding skirmishes that followed, both sides raised the stakes with the help of investment partners. QVC received backing from cable companies Comcast Corp. and Liberty Media as well as from the giant telephone operator Bell South. Meanwhile, Viacom signed up Blockbuster and later NYNEX Corp., the New York-based Baby Bell. Diller won a major legal victory in December when a Delaware court forced Paramount's Davis to dismantle his antitakeover defenses. Since that time Davis has become, to his chagrin, largely a bystander while the Diller-Redstone fight drags on.

After the surprising events of last week, the lingering question is why Viacom bothered to put such an offer on the table at all. One possible answer is that Redstone and his advisers believe that shareholders will not only appreciate the larger cash component of their offering but will also be swayed by future profit possibilities. Some analysts maintain that Redstone's combination will indeed offer far more synergy than QVC and Paramount. Says Chris Dixon, an analyst at Paine Webber: "It's hard to imagine what business opportunities exist between QVC and Paramount that can match Viacom, Blockbuster and Paramount."

Either way, the eventual winner of Paramount will probably have paid an astonishingly high "ego premium" to secure the prize. That premium has been variously estimated at somewhere between $1 billion and $2 billion more than Paramount is really worth.

After five months of brawling, it finally seems as though the end is in sight. While he stopped short of declaring outright victory for the home- shopping channel, "Diller will not lose any sleep over this new bid," says analyst Logsdon. If Diller does not alter his own bid (most observers believe he will not) and Viacom fails to sweeten its package by early next week, then it remains for Paramount's shareholders to vote with their shares of stock. Though QVC and its advisers radiated confidence at the end of last week, they were not above taking out a little insurance, hinting that they may challenge Viacom's move in court. "The new Viacom offer violates the bidding procedures agreed to among QVC, Paramount and Viacom and does not operate to trigger a new round of bidding," said a company press release. "The new offer is inferior to QVC's. Moreover, the blended value of the new offer will be less than Viacom's previous offer."

If that is true, if Viacom has labored mightily to produce a bid that is not even as strong as its own last bid, then Redstone has made a massive miscalculation. In any case, it seems that the battle is close to being decided by the people who are supposed to make such decisions in the first place: Paramount's shareholders.

CHART: NOT AVAILABLE

CREDIT: TIME Graphic by Steve Hart

CAPTION: WHAT VIACOM HOPES THE DEAL WILL ADD UP TO

With reporting by Cathy Booth/Fort Lauderdale and Jeffrey Ressner/Los Angeles