Paramount deal: When will it end?


NEW YORK -- Call it the power of a misleading headline. Or blame it on the desire of money managers to get home at a decent hour on Friday night.

But whatever the reason, the great takeover war for Paramount Communications will drag on for two more weeks, despite the fact Viacom decided not to come up with an offer that was better than the one QVC Network had made.

How could that be? The headline that hit the tape late Friday afternoon talked of an offer of $105 a share in cash for control of Paramount. That was $20 more than Viacom had been offering, and $13 more than QVCs bid.

That evidently was all that a lot of money managers thought they needed to see. With the market closed for the weekend and a snow storm in New York making travel difficult, they figured that a higher bid meant the fight would continue. There was no need to tender to the old QVC bid, which was to expire at midnight on Friday, because it was now inferior. Or so they thought.

It took a while for reporters and analysts to sort through a very complicated announcement from Viacom -- an announcement that also included plans for Viacom to merge with Blockbuster Entertainment -- to figure out that there was only a very small increase of about $2 a share in the overall offer for Paramount. The increase in the cash part of the deal was offset by a decline in the back-end package of securities. And the blended value of the deal was clearly less than the value of the QVC deal.

By the time the numbers were crunched, the fund managers who might have tendered Friday night, and thus given victory to QVC, had left. "We called with the analysis, and we got voice mail," mumbled one official in the QVC camp.

QVC had an argument that Viacom's offer was worse, and so the fight could end without being extended. But that argument could only be made if a majority of shares had been tendered by midnight Friday. And the confusion created Friday afternoon evidently assured that would not happen.

Reuters quoted a QVC source as saying yesterday that the company had failed to get a majority, adding that Viacom had "tricked the market" with its inferior last-minute bid.

Just how much worse is the Viacom offer? It depends on the valuations assigned to the securities being offered by the two sides. Our estimates, admittedly subject to quibbles, show an overall difference of about $5 per share.

That difference would vanish if QVC stock, which closed Friday at $40.625, fell to about $34, while Viacom was unchanged. Or it would vanish if Viacom class A shares, which ended Friday at $41, leaped to about $52, while QVC was unchanged.

In fact, any valuation you see is likely to be too high. Both stocks have shown a tendency to fall whenever victory seemed near. Perhaps that only represents shorting by arbitragers trying to lock in profits, but it also may indicate that some people think the winner of this battle will end up overpaying, whatever the benefits of having QVC's Barry Diller run Paramount, or whatever the synergies of combining Viacom's cable operations with Paramount's library and production operations.

The last time Viacom changed its bid, prior to last Friday, was on Nov. 6. At that time, the blended value of the deal it offered was about $82.72 a share, considerably more than the current offer. The difference is that Viacom's share price has plunged since then, falling from $57.50 for the class A shares.

If you assume that the share prices then are more reasonable than the ones today, and compare the old offer to the new one using those share prices, you will find the new offer has a $H blended value of just 25 cents more per share.

For shareholders in Paramount, the wisest course now is to watch for two more weeks, when both tender offers will next close. Maybe somebody will raise their bid. But if one offer seems a lot better when the deadline for tendering nears, beware of last-minute headlines. They may be very misleading.

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