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NEWS ANALYSIS : To Bid or Not? The Malone-Diller Question : Entertainment: The cable titan and QVC chairman each has his reason to fight Viacom for a Paramount takeover.


Which way, Malone?

Whither, Diller?

The pending merger of Paramount Communications Inc. and Viacom Inc. has placed cable television titan John Malone in a bind that he has yet to resolve: whether to launch a hostile bid for Paramount with his ally, QVC Network Chairman Barry Diller.

The incentive is strong. Paramount is the last great studio to go on the auction block, and its film library could become a critical source of programming for the cable TV business dominated by Malone's Tele-Communications Inc., which serves about 18% of the nation's cable TV homes. In his fierce rivalry with Time Warner Inc., the one asset Malone has lacked is a major Hollywood studio.

Diller, for his part, knows only too well the value of Paramount's movie and television business, since he ran Paramount Pictures for 10 years. Acquiring Paramount would bring QVC much closer to its assumed goal of launching a fifth television network, and Diller would have the personal victory of reclaiming his old studio.

To succeed, however, Malone and Diller require favorable conditions on Wall Street and in Washington. In the past, Malone has been pilloried by politicians who held him up as a symbol of an arrogant cable TV industry that ran roughshod over consumers with rate increases and poor service.

In recent weeks, however, regulatory and court decisions have been going Malone's way. On Thursday, for example, a U.S. District Court in Washington ruled that the government has no right to limit the number of subscribers that a cable TV operator may serve.

Chances of a bid increase if Viacom's stock price falls sufficiently to disenchant Paramount shareholders, who will be receiving mostly Viacom B (non-voting) stock in the deal announced Sunday, which still awaits a shareholder vote.

Stock speculators are doing everything they can to encourage a rival bid. On Thursday, Paramount shares rose 50 cents to $65 on the New York Stock Exchange, while Viacom shares continued to slide. Viacom's Class A shares declined 50 cents to $61 on the American Stock Exchange, while Viacom B dropped 75 cents to $54.875.

If the price of Viacom B shares falls below $50 and remains there for two or three weeks, one trader said gleefully, "the party's over." Another bid would surely emerge, forcing Viacom Chairman Sumner Redstone to improve his original offer of $69.14 a share, just $9.10 of which is in cash.

Redstone--one of America's most tenacious businessmen--is certain to put up a fight. He vowed: "Now that I've done this deal, it's not going to be torn apart by anybody. Period." Although the drama is reminiscent of Paramount's effort to break up the Time Warner merger in 1989, a hostile bid by Diller would be more intense because of his longtime friendship with Redstone, and his investment banker's once-close relationship with Viacom.

Diller's adviser, Allen & Co., helped Redstone in his 1987 takeover of Viacom and, a few years later, tried to put a Paramount-Viacom deal together. Allen & Co. played no role in the most recent talks that resulted in Sunday's merger agreement. If Malone and Diller do launch a bid, it is expected to come from Pennsylvania-based QVC, where 47% of the stock is controlled by a voting partnership consisting of Diller, Comcast Corp. and Malone's Liberty Media Corp.

Tele-Communications itself would not play a role, even though that is where Malone spends most of his time as chief executive and derives his real power. But Malone is the 50% shareholder and chairman of Liberty Media, which was formed as a holding company by the 1991 spinoff of most of TCI's minority interests in programming networks and cable systems. Liberty has investments in two dozen cable networks and cable systems.

Until recently, there was an expectation that Malone might be forced to resign from one of his two companies to comply with ownership limits the FCC might impose under its mandate from Congress in the 1992 cable re-regulation act.

Indeed, the FCC had placed the matter on its agenda next week, but Thursday's court ruling throws the whole issue into question. The government is expected to appeal.

Although talk circulated Thursday that Diller and Malone might seek additional partners, raising money for a takeover bid is not expected to pose a big problem. QVC, for example, has already done the paperwork for a $400-million debt offering; its stock has also doubled since Diller took over, so QVC shares would form an important part of any bid.

Paramount itself is almost debt-free and its assets could be leveraged to help pay for a buyout. But no one is eager to see Paramount's purchase price soar to the point where a takeover means the company is hobbled with debt, in the way Time Warner was after its merger.

And that undoubtedly remains the debate within both the Diller-Malone and Viacom camps.

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