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Viacom day is sweet and sour

Viacom Inc.’s fourth-quarter net profits rose 16% to $ 13.58 million, or 11 cents per share, helped by a 32% surge in cash flow at MTV Networks, but a new legal threat to its takeover of Blockbuster Entertainment struck a sour note with the cable programmer.

A group of Blockbuster shareholders filed a motion in Delaware Chancery Court Monday for an injunction against Viacom’s proposed merger with the video rental chain. Vice Chancellor Carolyn Berger is expected to decide early today whether to schedule a hearing or dismiss the case.

The earnings, which were slightly below Wall Street forecasts, included $ 12. 75 million in dividends on Viacom convertible preferred stock belonging to NYNEX Corp. and Blockbuster Entertainment. One observer said profits failed to meet expectations because many analysts focused so intently on the merger battle that they forgot to update estimates to include the dividend charges.

Revenues for the programmer rose 4% to $ 530.38 million last quarter and operating cash flow added 13% to $ 119.2 million. Net interest expense dropped 35% to $ 27.68 million. Investors reacted positively to the news, sending Viacom Class B shares $ 2.50 higher to $ 28.88.

On a breakdown basis, fourth-quarter cash flow at the MTV Networks gained 32% to $ 71.3 million on a 26% leap in revenues to $ 195 million. Cash flow at the Showtime Networks grew a solid 20% to $ 9.1 million even though revenues edged up only 0.5%. At Viacom Entertainment, however,cash flow fell 32% to $ 6.9 million on a 21% drop in revenues to $ 56.9 million.

Viacom attributed that segment’s quarterly and annual weakness to the end of the first syndication cycle of “The Cosby Show” in the third quarter as well as a sluggish syndication market and start-up costs related to Viacom New Media.

Last September’s implementation of a federal cable-rate cut pressured quarterly cash flow at Viacom’s cable unit 23% lower to $ 39.2 million — including one-time costs — on a 5% decline in revenues to $ 100.3 million.

The television unit reported quarterly cash flow gained 12% to $ 10.5 million as revenues strengthened 4% to $ 25.5 million. At the radio unit, cash flow jumped 32% last quarter to $ 10 million on an 11% increase in revenue to $ 25 million.

“It has all been very favorably received by the marketplace,” said John Turo, research director at Rodman & Renshaw.

For the year ended Dec. 31, Viacom reported net income including preferred dividends of $ 158.2 million or $ 1.31 per share, up a whopping 223% from 1992. That includes a pretax gain of about $ 55 million in the 1993 first quarter from the sale of Viacom’s Milwaukee cable system. Annual revenues rose 8% to a record $ 2 billion and cash flow firmed 11% to $ 385 million, also a record. Net interest expense dropped 25% to $ 144.95 million.

The complaint filed in Delaware alleges that Blockbuster’s board of directors neglected their fiduciary duty in deciding on Jan. 7 to sell control of Blockbuster to Viacom for about $ 31 a share without seeking higher bids in the marketplace.

Blockbuster shareholders have threatened to veto the proposed merger with Viacom as the offer has declined in value to about $ 24 a share. They say Blockbuster is worth $ 28 to $ 30 per share. Its shares closed up 25 cents at $ 26.50 Monday, above the offer price on perception that Viacom will have to sweeten its bid.

Chairman H. Wayne Huizenga has already expressed a desire to renegotiate parts of the merger agreement.

The motion also charges that a subscription pact requiring Blockbuster to spend $ 1.25 billion on about 23 million shares of Viacom Class B stock at $ 55 per share — inked when the stock was trading at $ 41 per share, followed by a drop to $ 27 per share — is a “lock-up” to dissuade other parties from making an offer.

The shareholders are asking the court to hear their case before March 11.

They cite the Delaware Supreme Court ruling released last month in Paramount Communications vs. QVC Network that a change of control constitutes a sale, in which case directors must hold an auction to find the best offer and maximize shareholder value.

A source close to Viacom, however, denied the Blockbuster complaint was like QVC’s. He said while the shopping network filed a motion for an injunction against the Viacom-Paramount merger less than four weeks after its own offer, “this is a situation where they sat around and did nothing and now they are asking for extraordinary relief from the court at the last minute.”

Several analysts agreed the delay in filing the motion would likely lessen its weight. They also pointed out that the existence of both a merger and subscription agreement meant the “lock-up” charge would not hold water.

Institutional investors currently own about 51% of the video chain’s shares. Huizenga has the backing of 25% to 29% of the total shares outstanding, but if the board’s independent directors do not support the merger, a two-thirds majority of shareholders will need to approve the merger.

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