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JAMES FLANIGAN

Attn. Paramount Shareholders: Think Management, Not Price

September 29, 1993|JAMES FLANIGAN

If you're a Paramount Communications shareholder caught up in the bidding contest for your company, do keep in mind that you're buying, not selling.

Whether Sumner Redstone's Viacom or Barry Diller's QVC Network wins your company, they will pay you mostly in their company's stock. And the price they're offering--roughly $83.50 a share by QVC or $64 a share by Viacom, with a higher bid expected this week--is high given Paramount's current earnings, which means the winner will have to make the assets work and grow.

That being the case, the smart thing might be to sell your Paramount stock--which closed at $77.75 a share Tuesday--when the bidding contest heats up one more notch. Time Warner, the result of a 1989 media merger extravaganza, still has not regained the high price that Time Inc. stock hit then.

But if you want to hold on through the merger, you should be thinking of which suitor holds the greatest promise for growth.

Diller, 51, gets the nod, in large part for creativity--he made Paramount a success as studio head years ago, then went on to build the Fox TV network and is now head of QVC, a home shopping cable channel that he aims to make a cutting edge property in interactive television.

But the contest is not a blowout. Diller is a brilliant employee, but Redstone, 70, thinks like an owner--which is why initially he offered less cash. If you can buy with paper, why use money? Redstone also has credibility in creating value: He and Viacom President Frank Biondi have managed MTV and the Nickelodeon cable channels to great success.

As a Paramount shareholder, you should recognize that when this deal is done, many Wall Street professionals will sell their stock. But long-term investors will buy if they're persuaded that the folks in charge have vision and ability.

And to know what those words mean, you might begin by asking why Paramount is being sold and for such a high price.

It's being sold because the movie business faces enormous change, but Paramount Chairman Martin Davis, 66, doesn't have a vision of how his company should change with it. So, wisely for his shareholders, he is selling out at a very high price.

Diller's offer promises to push the ultimate price of Paramount close to $90 a share--one-third more than the stock has ever sold for, and, at more than $10 billion, a whole lot more than giant MCA, a much larger company, fetched three years ago in the last great movie studio buyout.

Why so high? Scarcity value for one thing. Paramount is almost the last of the old-line studios available to be purchased. Disney is a giant unto itself, as is Time Warner; 20th Century Fox is part of Rupert Murdoch's global communications plans; Columbia and Universal studios are owned by Sony and Matsushita, respectively; and MGM-UA, the remnant of once-powerful MGM plus United Artists, is struggling to revive.

Even at the dawn of the multimedia age, a studio like Paramount remains a powerful production and distribution system. It has relationships with theater owners across the United States and around the world, based on the ability to produce 20 or so films a year--a $600-million annual investment in new product. If you're a major studio, with a film library for collateral, you can raise the capital to make that investment. And then you're sure of getting your movies into theaters and reaping half the box office revenue--which can be incredible if the movie is a hit; Paramount's "The Firm" took in $150 million in a few months this summer.

And a box office hit means bigger revenues in video rentals and repeat showings on broadcast and cable television.

In that regard, Diller is the only proven movie picker among the bidders for Paramount. And his bid is backed by two giants of cable TV, John Malone of Tele-Communications Inc., the nation's largest cable company, and Brian Roberts of Comcast Corp., the third-largest cable firm.

Their plan is that Diller will be able to pick hit films, increasing the cash flow of Paramount while also creating services and cable channels using the Paramount film library, just as Ted Turner has created TNT and the Cartoon Channel out of the MGM film library.

Redstone and his possible new backers, Blockbuster Entertainment and Cox Enterprises, obviously have similar plans but whether they have the vision to do what Malone and Diller can do is a real question.

That's basically the short-term outlook for the company that comes out of the bidding contest.

But long term, you're hearing talk of 500 channels and suggestions that winners of this contest will control "content" or "software" for the multimedia future.

Most such talk is hype. In the digital future, when computers combine with video, "there will be hundreds of competing monopolies, information and entertainment coming from many sources, in many ways," says Andrew Kessler, an authority on multimedia and a managing director of Unterberg Harris & Co., a San Francisco investment firm.

And the model of the future is not a 500-channel TV set but a telephone, says Robert X. Cringely, a noted writer on technology. "Your telephone handles an almost unlimited variety of callers without any fuss or talk of channels, simply because it has a switching system," notes Cringely.

If Redstone this week brings in financing help from a regional Bell telephone company, his bid could become interesting.

But the bottom line is that Paramount may sell for about $88 a share, says a Wall Street analyst. That means you'll need earnings growth if you're a Paramount shareholder, "and if you're a Paramount employee, prepare your resume," remarks the analyst. "Somebody is going to have to pay for this."

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