Viacom, Blockbuster Unveil Surprise Merger : Business: Two companies make an extraordinary move in last-minute bid to take over Paramount Inc.

In a cliffhanger worthy of a Hollywood box office hit, Viacom Inc. and Blockbuster Entertainment Corp. agreed to merge Friday as part of an eleventh-hour gambit to derail a marriage between QVC Network and Paramount Communications Inc.

As part of the proposed merger--the result of marathon negotiations over the last three days--Viacom-Blockbuster said it will sweeten its bid to $105 a share, or a total of $6.5 billion, for 50.1% of Paramount’s stock.

The move was the most dramatic yet in the 4-month-old takeover brawl for the entertainment giant that includes Paramount Pictures and Simon & Schuster.

It is also one of the most extraordinary actions in U.S. corporate history.

Analysts on Friday were scratching their heads over the ramifications, since there appears to be no precedent for two companies as large as Viacom and Blockbuster merging in order to facilitate a takeover.

Viacom and Blockbuster valued their stock-swap merger at $8.4 billion, based on Friday’s closing stock prices.

If the companies succeed in acquiring Paramount, the resulting three-way merger would produce a company with a staggering market value of $25 billion and revenue of about $10 billion. The new company would generate about $1.4 billion a year in cash.

News of the merger agreement created a furor on Wall Street over whether Viacom-Blockbuster had put forth a substantially new bid that would reset the clock another 10 days in the Paramount bidding, or whether shareholders should begin tendering the stock immediately to QVC.

Meanwhile, QVC on Friday charged that Viacom’s new offer violates the bidding procedures previously agreed to by all the parties in the Paramount fight.

On those grounds, QVC’s lawyers contended that Viacom’s new offer does not “trigger a new round of bidding.”

QVC’s advisers are expected to make a decision about extending that company’s tender offer before the weekend is over.

Wall Street traders on Friday were already speculating that BellSouth Corp., one of QVC’s backers, might help QVC raise its bid by upping its investment in the home shopping channel.

Although Viacom and Blockbuster’s merger announcement was draped in the virtues of combining one of the largest cable-TV companies with the premier home video retailer in the country, analysts said it was really driven by Viacom’s need to align itself with a partner that has the financial wherewithal to prevail in the Paramount takeover battle.

Previously, Viacom on its own was offering $85 per share, and QVC was offering $92 per share, for 51% of Paramount’s stock.

Both companies were also offering a package of securities for the remaining 49%.

Analysts immediately responded by noting that the “blended value” of the revised Viacom-Blockbuster offer--the combined value of cash and stock--was less than QVC’s tender offer now on the table.

“It’s a lower bid,” Furman Selz analyst John Tinker said. “But it’s a greater proportion of cash. So QVC will probably have to increase its cash portion a little bit. The real issue is Viacom and Blockbuster now have another 10 days to figure how far they really want to go.”

Jessica Reiff, an analyst with Oppenheimer & Co., said that “there is no question that Viacom has a higher cash bid. But it’s only 50% of the company. So the real value is in the back end, and we’ll know about that next week when trading begins again.”

Trading in Viacom and Blockbuster stocks was halted before the announcement was made Friday afternoon, making it difficult for analysts to calculate the value of the new bid based on market reaction.

Under the merger agreement, Blockbuster shareholders will receive 0.08 of a share of Viacom class A stock, 0.60615 of a share of Viacom class B stock and one “variable common right” for each share of Blockbuster that is convertible to class B shares.

If Viacom-Blockbuster is successful in acquiring Paramount--the merger is not contingent on the tender offer--Blockbuster has agreed to invest an additional $1.5 billion in Viacom through the purchase of Viacom class B shares. The companies said that will provide Paramount shareholders a richer cash reward without diluting their stock.

Viacom Chairman Sumner Redstone, who previously said the bidding for Paramount had reached “Never Never Land,” defended the new higher bid on the grounds that the extra cash was coming from Blockbuster and not Viacom.

“Viacom has not had to add one more cent from our last offer in order to increase the cash component,” he noted.

Redstone would still control about 60% of a merged Viacom and Blockbuster and hold about 30% of the equity.

He said the proposed merger builds upon the companies’ shared vision of becoming a broad-based entertainment giant for the anticipated technological revolution in interactive television and video-on-demand.

Blockbuster Chief Executive H. Wayne Huizenga would apparently take a secondary role.

Unclear is what role, if any, Paramount Chief Executive Martin S. Davis would play in a combined Viacom-Blockbuster-Paramount entity.

Although Davis had been tagged to become chief executive in the event of a Viacom-Paramount merger, there was no mention of him in the Viacom-Blockbuster announcement.

Davis “understands the situation a lot, and whether there is a role for him to play is something we will give a lot of thought to,” Redstone said. “But no matter what they outcome (Viacom Chief Executive Frank Biondi) will be C.E.O.”

The subject of a full-scale merger first came up in late December, according to sources, with talks led by Huizenga and Blockbuster Vice Chairman Steven Berrard on Blockbuster’s side and Redstone and Biondi in Viacom’s side.

Berrard and Biondi talked briefly about the deal over the holidays in Arizona, where both happened to be vacationing.

Negotiations reached a frenzy this week, continuing nonstop from Wednesday until the deal was signed Friday afternoon, about 2:30 EST. Most participants got little or no sleep.

The most difficult issues eventually came down to control and price, as they do with most mergers.

In an interview, however, Berrard declined to single out any specific hurdle, saying much of the time was spent on “mechanical and procedural” issues over what type of Viacom shares Blockbuster stockholders would receive.

In the end, Huizenga is taking a back seat to Redstone, a place the entrepreneur has virtually no familiarity with.

What’s more, no specific succession plan has been put in place spelling out what Huizenga’s role would be upon Redstone’s retirement.

Some executives who know Huizenga well said they were surprised that he would do that, and suggested that it might not be so easy for Huizenga and Redstone to work side by side because of their strong personalities.

But Berrard said the two get along very well, and he discounted any potential friction.

“The chemistry between the two of them is what made this happen,” Berrard said.

While Redstone will have more than 60% of the voting control of the combined company, Blockbuster shareholders will own about 60% of the equity, Berrard said.

One question is whether there would a conflict in the ownership of professional hockey teams, because Huizenga owns the Florida Panthers and Paramount own the New York Rangers.

National Hockey League rules prohibit owners from having more than one team.

Berrard downplayed any conflict, saying that the Panthers are a personal investment of Huizenga’s that would be separate from Paramount’s ownership of the Rangers.

Some in Hollywood have speculated that the Viacom deal amounts to an acknowledgment by Blockbuster that its video-rental business--however profitable it is now--has a limited life with technological advances on the horizon that will allow movie watchers to call up vast numbers of films from home.

Berrard, however, said the fear of becoming obsolete was not a motivating factor.

“Technology, as far as we are concerned, is a long way out. This merger had nothing to do with a fear of technology. If anything, we’re excited to think we can build our business and also be involved in technology,” Berrard said.

Berrard said that the companies, even without Paramount, see a number of business opportunities together.

As an example, Berrard said, Blockbuster now controls Discovery Zone, an indoor play center for children that could benefit by linking up with Viacom’s Nickelodeon children’s channel.

Blockbuster’s more than 3,000 stores would also help Viacom market products related to its MTV and Nickelodeon channels, he said.

* RELATED STORIES: A17

A Potential Mega-Merger

A three-way merger of Paramount Communications Inc., Viacom Inc. and Blockbuster Entertainment Corp. would create an entertainment colossus with holdings in everything from cable and satellites, to TV, movies and video rental, to professional sports.

COMBINED FINANCES (1992)

Revenue: $7.4 billion

Profit: $452.4 million

Earnings per share: $3.58

Employees: 40,750

HOLDINGS (1992)

Cable television: 1.1 million customers

Cable networks: MTV, VH-1, Nickelodeon, Showtime, The Movie Channel, FLIX, USA Network (joint ownership) including the Sci-FI channel.

Video retail outlets: 3,593

Music stores: 507 in the U.S. and seven foreign countries

Music publishing: more than 100,000 music copyrights

Movies: 3,790 film library; Paramount film production studios

Movie theaters: 1,927 screens in the U.S., Canada, U.K. and nine foreign countries

Television production and syndication: “Star Trek, The Next Generation,” “Entertainment Tonight,” “Matlock,” “Diagnosis: Murder,” “The Montel Williams Show”

Spelling Entertainment Group: (70.5%)

A 35% interest in Republic Pictures Corp., which merged with Spelling Entertainment Group

Performance venues: Madison Square Garden in New York, including the 20,000 seat arena

Sports teams: New York Nicks (basketball), New York Rangers, Florida Panthers (hockey), Florida Marlins (baseball), Miami Dolphins (football, part ownership).

Broadcasting: 12 TV stations and 14 radio stations

Publishing: Simon & Schuster, Prentice Hall

Theme parks: six in the U.S and Canada; a 21% interest in Discovery Zone Inc., a franchisee of indoor children’s recreational fitness centers

Sources: Times reports, Company reports, Wire reports, Bloomberg Business News, Standard & Poor’s Corp.

Researched by ADAM S. BAUMAN / Los Angeles Times

Next Moves in Bidding War

The proposed merger between Viacom and Blockbuster gives Viacom the financial firepower to up its ante for Paramount. But the deals are far from concluded. Here’s a look at what may lie ahead.

Bidding: QVC has until Jan. 21 (10 working days) to make a new offer.

And more bidding: Under Paramount’s bidding rules, Viacom and Blockbuster would have another 10 days to top a higher QVC offer.

And more meetings: Paramount directors will meet next week to consider the latest Viacom/Blockbuster offer.

Decision time: Paramount shareholders decide individually which suitor to tender shares to.

Meanwhile: Blockbuster and Viacom shareholders vote on the merger of the two firms.

Approvals: Regulatory clearances, such as from the Federal Communications commission, are sought.