Viacom Will Sell Its Cable Unit to TCI for $2.25 Billion : Television: The move would help Viacom reduce debt incurred through acquisitions of Paramount and Blockbuster.

Viacom Inc., moving to slash its $10-billion debt in the wake of last year’s acquisitions of Paramount Communications Inc. and Blockbuster Entertainment Corp., reached an agreement Tuesday to spin off its cable operations to Tele-Communications Inc. in a deal valued at $2.25 billion.

The two-step deal, which had been expected for some time, involves Viacom initially divesting the cable operations to stockholders in a tax-free transaction. TCI, the nation’s largest cable company, would then buy control of that newly formed company for $350 million, also taking on $1.35 billion in debt.

The deal, which is expected to close after the first of the year, is structured to minimize taxes for Viacom. Overall, Viacom said, the transaction will allow the company to cut its debt by $1.7 billion.

Last year, Viacom acquired Paramount in a $10-billion deal, following that with an $8.4-billion stock swap to gain the Blockbuster video chain. Since then, Viacom has been struggling to boost its debt ratings above the “junk bond”--or below investment grade--levels. Analysts expect the company to accomplish that soon in the wake of the cable sale. Achieving that goal would be important because it would lower Viacom’s interest payments and make the company more attractive to investors.

In selling the cable operations, New York-based Viacom is leaving the business altogether to focus on what Chairman Sumner M. Redstone said would be a “content-driven media company.” Viacom’s entertainment and programming assets include Paramount Pictures, Paramount Television, MTV, Nickelodeon, the Showtime cable channel, book publisher Simon & Schuster and Blockbuster.

Viacom said the cable sale will enable it “to unlock the value of non-core assets” in addition to cutting debt. Viacom’s cable systems serve 1.2 million customers in the San Francisco Bay Area, Washington state, Oregon, Ohio and Tennessee. Stockholders who still want to invest in cable can swap Viacom shares for preferred stock in the new TCI-controlled company.

Viacom’s most immediate goal is to keep its stock price up. Under a clause negotiated during its acquisition of Blockbuster, Viacom must issue 17 million additional shares of stock if it is unable to keep its stock price above $52 a share for 30 consecutive days in the period prior to Sept. 29.

That clause was built in as a safety net for Blockbuster shareholders concerned that the value of Viacom stock they were getting might drop too far. If Viacom can keep its stock price above $52 a share--its Class A stock climbed $1.625 on Tuesday to close at $51.875 on the American Stock Exchange--the company is off the hook on distributing those securities.

Beyond that, analysts speculate that Viacom’s major objective is gaining a music label. Music is the biggest missing piece in Redstone’s entertainment empire. One possibility could be music giant EMI in the wake of a recent disclosure by the company’s British parent, Thorn-EMI, that it may split in two.

Some Wall Street traders have speculated that Viacom may join in bidding for CBS in the wake of an expected $5-billion bid for the network by Westinghouse Electric Corp.

Most prospective CBS suitors believe the network is worth much less than that, and Viacom executives have said they aren’t interested in the network at that kind of price. What’s more, any move by Viacom to bid on CBS would probably defeat the company’s efforts to boost its stock price above $52 a share before the Sept. 29 deadline.

“I don’t think that Viacom has any interest in joining the party on CBS. The biggest goal is to get a piece of the music business,” said Harold Vogel, an entertainment analyst with Cowen & Co.

The sale of the cable operations to TCI comes after a previous attempt to sell the properties to a minority-owned firm was scuttled when Congress rescinded a key tax break. The sale to TCI marks another step in the patching up of the once-frosty relations between Redstone and TCI Chief Executive John Malone. Viacom filed an antitrust lawsuit against TCI--now expected to be settled--in late 1993 at a time when TCI was backing Viacom’s competitor for Paramount, QVC Inc.

The sale to Englewood, Colo.-based TCI is part of a larger trend in which smaller and mid-sized cable operations are increasingly selling to large cable concerns such as TCI and Time Warner Inc., which can “cluster” systems for added efficiencies and clout.

Investors on Tuesday also bid up TCI’s shares, which rose $1.06 to $24.875 in Nasdaq trading.

In addition to the cable assets, Viacom has a few more assets analysts believe may be sold. One possibility is the music retailing operation it acquired when it bought Blockbuster, which has been hurt by industrywide price cutting and competition from discount stores.

Analysts suggest another possible asset sale could be a piece of Discovery Zone, a chain of play areas for children. Viacom has already shed Paramount’s Madison Square Garden sports group, which included the New York Knicks basketball team and the New York Rangers hockey club.