BellSouth in, Liberty out
Under terms of the agreement reached Thursday, BellSouth -- the largest and most profitable of the country's seven Bell operating companies -- will purchase $ 1.5 billion of QVC equity and the two companies will form a joint venture to pursue opportunities in interactive television and communications.
BellSouth would have a 13.7% stake in the merged operations of Paramount and QVC if that marriage takes place.
Liberty Media, under terms of an agreement reached with the Federal Trade Commission, will divest its 22% stake in QVC if the company's Paramount bid is successful; it has already withdrawn the incremental $ 500 million it was to contribute to the bid. With Liberty and Tele-Communications Inc. seeking to merge with Bell Atlantic, Liberty's exit from the Par picture is expected to appease FTC concerns under Hart-Scott-Rodino antitrust legislation that Liberty topper John Malone was getting too powerful. It also is expected to lead to regulatory approval for the proposed merger.
Moreover, the move is expected to enable QVC to increase its bid, which stands at $ 80 a share. Speculation on Wall Street has QVC coming back with a modified bid --$ 90 a share was the number making the rounds -- possibly as early as today.
Today's New York Times also reported that executives close to the negotiations said they expected Diller to increase his bid today.
Rival bidder Viacom is proceeding with an $ 85 a share tender offer for Paramount that has already been approved by the Paramount board and is sched uled to close Nov. 22.
While QVC would not comment on the timing or size of a revised bid, topper Barry Diller praised the new partnership: "BellSouth, in combination with our partners in cable and publishing, Comcast Cox and Advance, give us not only increased financial resources but also significant and balanced strategic relationships throughout the media spectrum." He added: "If we can harness the intellectual resources of these companies, we should be able to compete effectively throughout the world as we proceed through this remarkable decade of entertainment and communications development."
Despite the announcement, the real key to the Paramount saga remains what happens Tuesday in Delaware Chancery Court.
QVC has asked the court to void Paramount's "poison pill" and hefty termination fees the company is required to pay to Viacom if the two are unable to complete their merger. QVC has argued these barriers effectively prevent shareholders from considering a rival bid.
"If the Delaware court establishes a level playing field, then Paramount will go to the highest bidder," said Wertheim Schroder analyst David Londoner. "If it does not remove the pill and the lockup, Diller can't bid; it's just prohibitively expensive." Diller himself had said the court's decision will determine whether he is able to continue his quest.
And questions remain about the addition of BellSouth and the loss of Liberty.
BellSouth brings to the table deep pockets, one of the nation's fast growing service areas and a genuine enthusiasm for developing interactive technologies.
"This alliance provides us with a valuable foundation to pursue other interactive entertainment opportunities and to capitalize on opportunities within electronic retailing and entertainment programming," said BellSouth chairman and CEO John Clendenin.
And it is clear that BellSouth -- unlike Viacom's telco partner, Nynex, which settled for a non-voting stake and a board seat -- is determined to take an active role in the future of QVC. The telco will emerge as the single largest shareholder in QVC and will be able to appoint three members to the company's board.
While BellSouth has agreed with Diller's Arrow Investments and Comcast to vote their interests as a group, as long as two of the three agree, the company seems determined to take a proactive stance. "We have just as much say in the business as Barry Diller and Comcast do," asserted a BellSouth rep.
Even so, NatWest Securities analyst George Dellinger has argued that in no way does the replacement of Liberty with BellSouth represent an equal switch.
"While the legal and political risks associated with QVC's bid for Paramount are significantly lower because of the decoupling of its link to Liberty, the alliance struck with BellSouth does not take the likelihood of putting together a winning bid much higher," he concluded in a recent report. "Besides the fact that investors may view this last-minute move as somewhat sophomoric, the few synergies that accompany a QVC/Paramount combination become even more minuscule when the backing by TCI, the nation's largest and most influential factor in cable programming, is replaced by a local telephone company."
Few on Wall Street shared Dellinger's view. S.G. Warburg analyst Lisbeth Barron noted there is nothing that prevents QVC and TCI from doing business down the road, even though they are no longer financial partners.
Comcast -- which holds a 22% stake in QVC -- said it was delighted with the partnership. "Our combined technologies and delivery systems along with QVC, Cox and Advance will provide a distinct advantage in the race toward the new information age," said Comcast prexy Brian Roberts. And some see the departure of Liberty as an opportunity for Comcast -- the nation's fifth-largest cable operator -- to step out from the shadow of John Malone.
Liberty characterized the move as being in the best interests for QVC. "This agreement with the FTC was the most helpful step we could take to support QVC's bid for Paramount," said Liberty chairman and CEO Peter Barton. "Clearly, with the participation of BellSouth, QVC has now attracted sufficient financial support to pursue and acquire Paramount. We remain resolved to assist QVC in this acquisition in any way we can."
Even so, sources said Liberty's move is not entirely selfless; it is expected to remove some regulatory concerns regarding Liberty's proposed merger with TCI and Bell Atlantic and also weaken an antitrust lawsuit brought against TCI by Viacom.
The agreement, contingent on QVC's successful merger with Paramount, calls for BellSouth to purchase $ 1 billion of QVC common stock, or about 16.7 million shares, at $ 60 per share, and $ 500 million of QVC 6% convertible exchangeable preferred stock, convertible into approximately 7.6 million shares of QVC common.
Additionally, each of the controlling shareholders will be permitted to acquire additional shares. If the proposed acquisition of Paramount is not completed, BellSouth will have the option for up to six months to purchase $ 500 million of QVC common stock at a price of $ 60 per share and to join the QVC stockholder control group.
If the agreement is approved by the FTC and the merger takes place, Liberty will be required to divest its interests in QVC within 18 months after the Liberty consent decree becomes final.
QVC has also agreed -- if Liberty so requests -- to compensate Liberty for any shortfall in the sale of its shares below $ 60 per share during the last four months of the 18-month divestiture period, or to purchase Liberty shares at $ 60 per share not later than the end of the 18-month period.
