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Par swallows a bitter pill

WILMINGTON, Del. — The Delaware Supreme Court Thursday handed QVC Network its biggest victory yet in the war for Paramount Communications.

And a smashing victory it was. By upholding a Chancery Court decision to throw out key lockup agreements between Paramount and Viacom and enjoining Paramount from selectively applying its poison pill, the court effectively created a level playing field between the two bidders. The outcome now will be determined by who is willing to pony up the highest offer.

Money manager Mario Gabelli, whose funds represent one of Paramount’s largest ownership blocks, called the ruling a “great victory for the stockholders of Paramount.”

The unanimous ruling — handed down by Chief Justice E. Norman Veasey and justices Andrew G.T. Moore II and Randy J. Holland after just a four-hour recess — should put an end to the legal wrangling over Paramount and could set precedence for future takeover cases.

“The ruling sends a clear signal that when shareholders give up their voting control of a company, they have to be compensated with the highest offer available,” said attorney Arthur Abbey, who represents Paramount shareholders.

Before a packed courtroom replete with television cameras (the hearing was carried live on cable channels CNBC and Court TV), lawyers for Paramount and Viacom argued that they had entered into a strategic merger, not a sale, with the best long-term interests of the shareholders in mind.

Further, they said a change of voting control — Viacom chairman Sumner Redstone would be the majority shareholder in a merged Paramount/Viacom — should not force the company to be put up for auction to the highest bidder as prescribed under the landmark case Revlon vs. MacAndrews & Forbes.

But that argument wilted under an endless flow of difficult questions from the tribunal — which veteran court observers described as uncharacteristically animated under the gaze of the TV cameras — and a withering attack from QVC attorney Herbert Wachtell. Wachtell described the lockup agreements as coercive devices whose sole purpose was to impede other suitors from making a bid.

In a scathing assault, Wachtell said Paramount directors did not lift a finger to protect the long-term interest of shareholders. He said the Paramount board was “uniformed, misinformed and evidenced no desire to be informed.”

To support his contention, Wachtell pointed to the fact that Paramount’s financial adviser, Lazard Freres, was never asked to qualify the value of a comparative transaction like QVC’s. “That’s because the board did not want an opinion from Lazard,” Wachtell said. “In fact, QVC could not give its opinion even if it wanted to because it was prohibited from talking to QVC.” He described a report that Paramount commissioned from consulting firm Booz Allen to evaluate the competing offers as “a joke … a very bad joke.”

The Supreme Court ruled that a change of control would indeed take place under a Viacom/Paramount merger and that irrespective of the board’s vision of a long-term strategic alliance, Redstone could, as majority shareholder, compromise that vision by breaking up the company, cashing out the minority shareholders or altering materially the equity interests of the minority public shareholders.

And the court agreed with Wachtell’s argument that a no-shop agreement, which Paramount claimed prevented the board from considering QVC’s offer, in no way relieved the board of its fiduciary duty to its shareholders. Accordingly, the court said it is the board’s duty to search for the best value available to the stockholders and consider QVC’s bid.

The high court leaned so heavily in QVC’s favor that it said it would have also thrown out the $ 100 million in termination fees — the only agreement between Paramount and Viacom that the lower court left standing — but left it up to the Chancery Court to revisit that issue.

While many hailed the court’s decision as precedent-setting, some found irony in the outcome. Noted one veteran analyst, “If QVC prevails and sells off pieces of the company, then in fact the court has acted to break up a company and has entered into a business judgment superseding the company’s board of directors.”

And the ruling must come as a crushing blow to Paramount chairman Martin Davis, who just four years ago saw the same court nix his attempt to break up the Time Warner merger. According to court documents, Davis covets a merger with Viacom, one that would ensure him the title of CEO.

But if Viacom expects to win Paramount now, sources said it will do so only by putting the higher offer on the table. “It’s the top of the ninth and Sumner’s up at bat,” quipped Gabelli. “If Sumner doesn’t come up with a better offer, Paramount goes to Diller.”

While many analysts say the offered prices are already too high — Edward Hatch of UBS Securities said the trading price of any merged entity could be expected to trade below the current price (as a multiple of cash flow) of either Viacom or QVC — most expect the ruling to set off a new round of escalating bids. “With the egos involved here, who knows how high they will go?” said Gabelli.

The QVC victory sent Paramount shares soaring $ 2.13 to $ 81.38 at the closing bell on extremely heavy volume of 3.044 million shares; the New York Stock Exchange’s fourth-most-active stock ticked up to more than $ 82 a share in after-hours trading. Viacom Class A shares closed unchanged at $ 49, while its Class B shares slipped 12.5 cents to close at $ 44.50. QVC sank $ 1.13 to close at $ 43.63, reflecting the new viability of its bid.

What happens next could be determined by Chancery Court Judge Jack Jacobs, whose earlier ruling the Supreme Court upheld Thursday, and who is charged with applying the court’s decision. Some sources said they expect Jacobs to order Paramount to put the company up for auction. Paramount issued a brief statement last night, which read: “The court’s decision that a change of control is a sale has, in our view, expanded existing law. We will, of course, proceed to live up to the spirit and the letter of the decision. With that in mind, we will promptly establish procedures applicable to all bidders for an orderly and fair process.”

Viacom announced that it has extended its tender offer, which was due to expire at midnight Thursday and is currently valued at about $ 9.4 billion, until midnight Dec. 13. The company said that, as of the close of business Thursday, about 9.2 million shares had been tendered and not withdrawn from its offer. QVC attorney Wachtell said that QVC would also extend its offer — currently valued at about $ 10.2 billion — even though, as of Thursday evening, the company had not yet set an extension date.

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