Viacom International on Thursday ended a two-week siege by purchasing a 17% block of its own stock from New York investor Carl C. Icahn. The company said it paid $62 per share, or $217 million in cash, plus warrants entitling the Icahn group to buy up to 2.5 million shares for six years.
The transaction was immediately labeled "greenmail" by Wall Street professionals, who estimate that Icahn will reap a profit of nearly $21 million. With the deal, Viacom--a cable and broadcasting company--became the 16th corporation to pay off Icahn since 1979, when the financier first threatened a company with an unwanted takeover battle.
Greenmail is a term coined for the practice of buying back an unwanted investor's shares at a premium.
The Icahn group spent an average of $65.75 per share, or a total of $230 million, for its 3.5 million shares of Viacom stock. Although Viacom paid Icahn only $62 per share in cash, the warrants could be worth $10 to $15 each, according to some professional investors who own Viacom shares. Company spokesman David Fluhrer refused to estimate the warrants' market value but said the exercise price won't be lower than $65.37 1/2 or greater than $72.
In addition, Viacom said it would provide the Icahn group with advertising time worth $10 million on its stations and cable networks. One likely user of the time will be Trans World Airlines, which Icahn controls.
For its part, the Icahn group pledged not to buy more Viacom shares or help others seek control of the company for at least 11 years. Last week, the Icahn group said it would be willing to pay $75 a share in cash for the company but had not received encouragement from Viacom's management. Analysts have estimated Viacom's value at $80 to $100 a share.
Viacom Senior Vice President Ronald Lightstone acknowledged Thursday that the $217-million stock purchase will exhaust Viacom's existing borrowing capacity of $1.025 billion. The company had already drawn down $811.7 million to pay for such recent acquisitions as KMOX-TV in St. Louis ($122.5 million) and MTV Networks ($184.2 million for a 35% interest not already owned).
Privately, one Viacom official said the company's vulnerability to a takeover has not ended. He said, however, that if a new raider materializes, the newcomer "has to be willing to play for real" and must be prepared to make a "tender for shares for some high price."
The executive said "the next guy knows he's not going to get bought out," because Viacom won't have the resources to take such an action twice. Such a raider would have to be prepared for the possibility that Viacom would seek a friendlier, higher bid elsewhere.
One investment banker, asking not to be identified, said the Icahn repurchase does not "bode well" for Viacom's management. "It was a greenmail," he said. "It just seems like they're putting themselves further and further under water." The banker noted that he has heard clients express interest in buying Viacom stock if it trades below $60.
Stock Price Down 18%
The price of Viacom shares dipped below $60 in trading Thursday on the New York Stock Exchange before closing at $60.12 1/2. At that price, the stock has dropped 18% from its 52-week high of $73.75.
After a company pays greenmail or buys back a large amount of its own stock to defeat a raider, its stock price often falls because traders no longer anticipate an imminent tender offer. The stock price might be further depressed if the company sells more stock or bonds to pay for the repurchase. Those depressed stock prices often attract a second wave of investors, as Walt Disney Co. and CBS have learned. Disney, for example, spent $325 million to buy out dissident shareholder Saul P. Steinberg's 11% stake in 1984. The value of Disney's stock tumbled 22% in the week after the buyback, and Minneapolis investor Irwin L. Jacobs began buying shares, eventually accumulating 7.7%. The Bass family of Fort Worth also bought shares, helped install a new management team and bought out the Jacobs group. The Basses now own about 19%.
Filing for New Issue
CBS, determined last year to ward off an unwelcome takeover bid by Atlanta broadcaster Ted Turner, bought back 21% of its shares for nearly $1 billion. Turner abandoned his bid, and Loews Corp. began buying CBS shares. Today, Loews owns 17% of CBS and has announced that it will buy up to 25%. Although no top management changes have occurred, Loews Chairman Laurence A. Tisch has joined the CBS board and is playing a very active role.
Last week, Viacom filed a registration statement to issue 7.5 million shares of common stock in a move that would increase its outstanding shares by 18% and grant an equal number of warrants to those who purchase the units. In that offering, Viacom said it would not use the proceeds to purchase Icahn's stake unless it offered the same terms to other shareholders.
The offering has not cleared the Securities and Exchange Commission, Lightstone said, and the company will "certainly have to amend it" if it decides to proceed.