NEW YORK — Viacom Inc. and Seagram Co. Ltd. threw the future of the USA Network back into the hands of a Delaware Chancery Court judge Monday, putting forward completely different proposals for breaking up their jointly owned cable network.
After six weeks of fruitless discussions aimed at finding a joint proposal for breaking up the network’s partnership — during which Viacom offered to buy Seagram out for $1.94 billion — Viacom asked the court to order a public auction of the entire network.
This proposal was flatly rejected by Universal Studios’ parent, Seagram Co. Ltd., which instead asked the court to order Viacom to sell out.
Delaware vice chancellor Myron T. Steele ruled May 15 that Viacom had breached the USA Networks partnership agreement and he ordered the two companies to jointly come up with a plan to dissolve the partnership in a way that took account of the “legal and factual conclusions of this court.”
Not even close
But the two companies couldn’t even agree on a procedure for breaking up the partnership, let alone agree on who should sell and at what price. Viacom revealed in its filing that it offered to buy Seagram’s 50% stake in USA for $1.94 billion in early June but Seagram vice chairman Bob Matschullat rejected the idea with a letter that insisted “we are not a seller.”
Matschullat added that since the court found Viacom to be in breach of the partnership, “we think it would be totally inequitable to call upon Universal to sell its interest in order to cure the problem Viacom created when it acquired Paramount in 1994.” The court ruled in May that Viacom breached the agreement by continuing to own and operate the MTV Networks after acquiring Paramount Communications.
Vice Chancellor Steele’s opinion in May was critical of Viacom and the arguments it put forward, which may benefit Seagram now that Steele is being forced to decide how to break up the partnership. Steele had said in May he would consider Universal’s request for damages while he considers proposals for dissolving the partnership.
Viacom appears to be hoping it can escape an adverse ruling by relying on Steele’s admission in his ruling that the cable network was “extremely well run and profitable” and that Universal had “failed to show … any immediate quantifiable harm” had occurred as a result of Viacom’s breach.
“With the entire opinion in mind, Viacom proposes as the only tried-and-true approach to dissolution a supervised auction of USA Networks to the highest bidder,” Viacom said in its briefing Monday. It added that such an auction would not help or hurt either Viacom or Universal but “would maximize the value to the current owners.”
Cable networks have become the most hotly sought-after entertainment properties in the past couple of years, highlighted by News Corp.’s acquisition of Family Channel’s parent company for $1.8 billion last month.
Viacom added that USA’s operating profits had jumped from $67.3 million in 1994 to $146 million in 1995, reflecting Viacom’s input into the cable network’s management. “It would be truly inequitable to now strip Viacom of the fruits of its investment at less than fair value.”
Viacom’s proposal envisages both Seagram and Viacom being free to bid during the auction, along with other parties, Viacom deputy chairman Philippe Dauman said in a letter to Matschullat last month that was included in Viacom’s filing. Dauman said Viacom “would agree to pay the expenses of the process.”
Seagram argued in its filing that Viacom’s proposal “would truly turn MCA’s victory at trial into a Pyrhhic one. Despite having been found to be an entirely innocent party whose partner breached its clear contractual and fiduciary duties, MCA would face the risk of losing control of a prized asset against its will.”
Instead, Seagram said the court should force Viacom to sell by forbidding the company from staying in the basic cable network business while it retains its USA interest — an injunction that would give Viacom a choice between its MTV Networks or its interest in USA — and paying damages “to settle past liabilities arising from … three-plus years of illegality.”