Par puts itself in play

After three months of desperately trying to consummate its proposed marriage to Viacom Inc., the board of Paramount Communications Tuesday put the entertainment giant up for auction.

Seeking to comply with a Delaware Supreme Court ruling last week, the board an1nounced that it has adopted bidding procedures that it contends will enable it to consider fairly all interested suitors, including hostile bidder QVC Network Inc.

As outlined by the board in letters sent to QVC and Viacom, the bidding procedures provide for a single round of bidding with each bidder submitting its best and highest offer to Lazard Freres (Par’s financial adviser) by 4 p.m. Monday, unless the board decides to extend that date.

While lawyers for the competing sides said they were evaluating the board’s action, attorney Arthur Abbey, who represents a group of Par shareholders, said the proof will be in how the board conducts the auction. “It appears an attempt to try to play fair and get to the bottom of this matter quickly, but only time will tell whether this format actually works,” Abbey said.

As is usual with closed-bid auctions, the sale process really begins with the submission of the offers. While the board said it intends to evaluate the proposals on a timely basis, it has stipulated that any submitted proposals must remain in effect through 5 p.m. on Jan. 7. And Paramount retains the right to negotiate further with any and all suitors once the bids are received — that includes working to increase the price.

Bidding volley

“It’s typical to get the rivals in two separate conference rooms and have the financial advisers confer back and forth to get them to keep upping their bids,” said one veteran mergers-and-acquisitions source, who noteda similar process took place in the takeover of RJR/Nabisco. “The goal is to pretty much keep everyone in the dark as to what’s really happening and in the process whip them into a speculative frenzy where they volley back and forth with escalating bids.” Most expect that to happen around Dec. 27.

Further, the board said that as a condition to its lifting the poison pill, it will ask the bidder it recommends as a winner to extend its offer at least 10 business days beyond its announcement and then another 10 business days from the time that all minimum conditions of its offer have been met.

The board will also drop the pill for other bidders who agree to likewise keep their offers open another 10 business days so that shareholders will be free to choose between the offers and even have time to switch between offers if they happen to change their minds. Accordingly, Wall Street sources said they would be surprised if a completed deal was announced before mid-January.

Evaluation criteria

While the timeline for completing a sale remains variable, the board gave bidders a sense of the criteria by which they will be evaluating the bids:

  • The board has a preference for cash and securities with a fixed income stream, a liquidation preference or, in the case of equities, securities that enjoy the benefits of a wide collar — which guarantees the value of a deal regardless of stock price fluctuations — or other value assurance mechanism. (No such mechanisms were present in either the Viacom or QVC tender offers.)

  • The board has a preference for a transaction as unconditional and subject to as few regulatory uncertainties as possible.

  • The board supports provisions designed to protect the interests of Par stockholders against the possibility of a squeeze-out merger, open market purchases or other transactions effected by majority or controlling shareholders that may adversely affect the interests of the stockholders in the continuing combined enterprises.

(One of the court’s main concerns was that there was nothing to prevent Viacom chairman Sumner Redstone — as majority shareholder of a combined Paramount/Viacom — from doing one of the above.)

In a letter to shareholders, Par said it could not endorse either Viacom or QVC at this time and recommended that shareholders take no action with respect to either offer until advised of the board’s recommendation.

Sources said the board’s evaluation criteria seem reasonable enough. However, some legal sources were shocked that the board did not establish an independent committee that excluded directors who hold management positions within the company, including chairman Martin Davis, president/chief operating officer Stanley Jaffe, chief financial officer Ronald Nelson and Paramount general counsel Donald Oresman.

The board also retained its original legal counsel and investment bankers, all of whom have come under intense scrutiny given the fallout from the Delaware courts.

“The board considered at the meeting the formation of an independent committee and it concluded it was inappropriate,” said a Paramount spokesman, who would not elaborate further about the meeting.

Sources said before Monday’s meeting that they expected chairman Davis to argue strenuously to retain control of the sale process; he apparently succeeded.

Wall Street seemed less surprised by the decision. “It’s pretty typical of the way that they have handled things so far,” said S.G. Warburg analyst Lisbeth Barron. “This board has clearly indicated whose interests it has at heart and it hasn’t been the shareholders.” Even so, Barron said it appears the board has finally established a fair forum. “From what we can tell, it appears that they are serious about giving it to the best bid, and that’s all you can really ever ask a board to do.”

Revised bids expected

Both Viacom and QVC are expected to meet with their financial advisers and major backers this week to discuss bid revisions. Even so, sources said they did not expect the new rounds of bidding to be appreciably higher than the companies’ most recent offers — QVC’s bid stands at about $ 83.15 a share, or $ 9.9 billion, while Viacom’s is valued at about $ 78.65 a share, or $ 9.3 billion — even though the cash portions and other attributes might be modified. Paramount closed Tuesday at $ 81.125, up 75 cents.

“The hope of a big windfall is overly optimistic in this case,” said analyst Edward Hatch of UBS Securities. “We’ve been suggesting that investors sell into these optimistic rallies. Unless the winner has a collar on the back end, you face some vulnerability. If you like the combined company, buy it later in the open market at what will probably be a lesser price.”

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