Judge Orders an End to Universal- Viacom Venture

Viacom Inc. and Universal Studios Inc. were ordered Thursday to discontinue their 50-50 partnership in USA Networks by a Chancery Court in Delaware, a ruling that could eventually allow both companies to expand their cable businesses.

Although the judge’s ruling was a victory for Universal, which brought the lawsuit in April 1996, the ultimate outcome to stem from the nasty, yearlong court dispute remains unclear.

“While Universal won in court, it’s not clear what it won,” said Harold Vogel, an analyst at Cowan & Co.

Most analysts expect Los Angeles-based Universal to ultimately buy out Viacom’s half-share in USA and its upstart sci-fi channel, together valued at about $3 billion.

Analysts say the ruling also clears the way for both companies to expand their cable interests without interference from the partnership. While other media companies have expanded aggressively into cable programming because of global growth prospects, Universal, which was purchased by Seagram Co. in 1994, has been barred from starting channels without including Viacom because of a non-compete clause in the USA agreement.

“This will accelerate Seagram’s movement into the cable network business, which is growing faster than the broadcasting business,” said Christopher Dixon, an analyst at PaineWebber Inc.

In his ruling, Vice Chancellor Myron Steele said Viacom’s ownership of MTV, Nickelodeon and other cable channels--which the company picked up in its 1994 purchase of Paramount Communications--put it in violation of that non-compete clause.

Referring to Viacom as a “disloyal partner” and calling some of its arguments “entirely specious,” the judge ordered the two partners to submit a plan to discontinue the partnership within 30 days. If the partners cannot agree, the judge said, he will determine the outcome based on proposals submitted by each, retaining throughout the process “wide discretion in fashioning an appropriate remedy.”

The ruling is the latest in a string of disappointments for Viacom, whose stock has been trading near 52-week lows because of persistent under-performance of its Blockbuster video unit and its high level of debt.

Viacom is viewed as a seller in large part because of those problems and investors’ dim view of additional acquisitions. In fact, Viacom backed out of a deal it struck with Universal before the trial started last year to buy its half-share in USA for $1.7 billion, because its stock reacted negatively to the news.

It is unclear whether Universal’s court victory will translate into a discounted price for Viacom’s half-interest in USA. Analyst Dixon expects Universal to pay close to $1.5 billion for the property, with Viacom using the proceeds to pay down debt or buy back its stock.

While Universal’s balance sheet would allow for aggressive expansion in cable, there are no networks available to buy, and a shortage of space on existing cable systems makes launching channels prohibitively expensive. Universal missed out on two country music channels, which were sold to CBS, and on E! Entertainment Television, which changed ownership earlier this year, with Comcast Corp. bringing in Walt Disney Co. as a partner.

Viacom displayed continued antagonism toward Universal on Wednesday by issuing a statement saying its adversary’s claim to a court victory was “clearly wrong.” Viacom said Universal failed to win damages it was seeking or immediate injunctive relief.

“It’s gonna be a long 30 days,” said Michael Schwartz, an attorney with Wachtell, Lipton, Rosen & Katz, which represented Seagram in the case. “The judge has ruled in very emphatic language that the agreement flatly prohibits what Viacom is doing. That’s not winning.”

Despite the acrimonious relations between the two sides, analysts predicted that they will come up with a plan on their own.

“It is in Viacom’s interest to settle this, given the tone of the judge’s ruling,” said Dixon, indicating that court remedies could be harsh.

Viacom Class A shares were unchanged at $29 on the American Stock Exchange on Thursday. Seagram rose 75 cents to close at $38.75 on the New York Stock Exchange.