PARAMOUNT AS A TARGET

WHO IS
BIG

DIVERSIFIED

INTERESTED MATURED

MORE ? BRANDED

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BACKGROUND

PARAMOUNT COMMUNICATIONS Gulf & Western previously,

name changed after acquisition of
Paramount Pictures

ESTABLISHED 1934 TYPE: Public

HQ: NYC, New York, US

PRESENCE: Worldwide

TYPE OF BUSINESS:

•  Entertainment/Motion Picture
production and distribution

•  Publishing

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BACKGROUND
VIACOM

ESTABLISHED 1971 TYPE: Public (NYSE VIA)

PRESENCE: Worldwide HQ: Burbank, California

US

TYPE OF BUSINESS:

•  Networks

•  Cable Television PACIFIC 14 RADIO

CALIFORNIA MIDWEST
NORTWEST STATIONS
•  Entertainment TV SERIES

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BACKGROUND

QVC NETWORK INC.

ESTABLISHED 1986 TYPE: Public

HQ: West Chester, Pennsylvania

PRESENCE: Worldwide US

TYPE OF BUSINESS:

HOUSEWARES ELECTRONICS
•  TV home shopping
JEWELRY TOYS COSMETICS

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 POTENTIAL MERGER
Film
Film & TV Film Film Cable Cable Theme
Company distributio TV stations Publishing
production Library Exhibition Network Operator Parks
n
MSG, USA
(50%), 7
Paramount ✓ ✓ ✓ ✓ SciFi stations ✓ ✓
(50%)
MTV, VH -
Comple
Viacom ✓ ✓ ✓ ✓ 1, Nick,
mentary
Showtime
channels
✓ 5 stations
12 stations ✓ ✓
Entertain
QVC ✓ ✓ ✓ ✓ ment
QVC+
Shopping
7 stations ✓ ✓

PARAMOUNT-VIACOM PARAMOUNT-QVC
•  HIGHLY •  RESTRUCTURING
•  COST CUTTING
COMPLEMENTARY ENTERTAINMENT •  GROWTH
ENTERTAINMENT •  CROSS PROMOTION
•  DISTRIBUTION
UTILIZATION

PUBLISHING
PUBLISHING •  POTENTIAL SALE •  POTENTIAL SALE

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PARAMOUNT STAND ALONE
End of
Estimation of cost of capital
1993
Long-term debt 1,013
Net Debt (market ≈ balance) 6 Cash and Equivalents 1,007

Equity (market value) 6,660 Share price 55.5

Shares outstanding, m 120
*
Cost of debt 7.24%
Cost of equity 12.25% Risk - free rate (30 year Treasury) 6.25%
Equity beta 1
D/V 0.05
Market risk premium 6%
E/V 0.95
Marginal tax rate 35%
Estimated WACC 12.24%
Multiples Industry Average, EBITDA
Terminal Value Est. 1993 Est. 1994
Company
EV/EBITDA projection 13 EBITDA EBITDA
Walt Disney 13.3 12.2
EBITDA in 1998 910 Time Warner 11.2 10.4
EV in 1998 11,922 Turner Broadcasting 14.8 11.9
Average 13.1 11.5

EV 8,558 DCF+discounted Terminal Value

*Risk-free 6
plus credit spread based on interest coverage ratio 3.61, credit rating A-
VIACOM STAND ALONE
End of
Estimation of cost of capital
1993
Cash and Equivalents 65
2,410
Net Debt (market ≈ balance) Long-term debt 2’475

7,159 Share price 62.75

Equity (market value)
Shares outstanding, m 53.4
* 10.75%
Cost of debt
13.45% Risk - free rate (30 year Treasury) 6.25%
Cost of equity
0.25 Equity beta 1.2
D/V Market risk premium 6%
0.75
E/V
35%
Marginal tax rate
11.82%
Estimated WACC
Multiples Industry Average, EBITDA
Terminal Value Est. 1993 Est. 1994
Company
EV/EBITDA projection 13 EBITDA EBITDA
Walt Disney 13.3 12.2
EBITDA in 1998 1,059 Time Warner 11.2 10.4
EV in 1998 13,874 Turner Broadcasting 14.8 11.9
Average 13.1 11.5

EV 9’246 DCF+discounted Terminal Value

*Risk-free 7
plus credit spread based on interest coverage ratio 1.79, credit rating B
QVC STAND ALONE
End of
Estimation of cost of capital Cash and Equivalents 14.6
1993 Current Maturities of LT debt 3.1
- Long-term debt 7.3
Net Debt (market ≈ balance) Share price 65.5
2,469 Shares outstanding, m 37.7
Equity (market value)
* 6%
Cost of debt
15.25% Risk - free rate (30 year Treasury) 6.25%
Cost of equity
0.00% Equity beta 1.5
D/V Market risk premium 6%
100.00%
E/V
35%
Marginal tax rate
15.25%
Estimated WACC
Multiples Industry Average, EBITDA
Terminal Value Est. 1993 Est. 1994
Company
EV/EBITDA projection 13 EBITDA EBITDA
Walt Disney 13.3 12.2
EBITDA in 1998 422 Time Warner 11.2 10.4
EV in 1998 5,528 Turner Broadcasting 14.8 11.9
Average 13.1 11.5

EV 3,153 DCF+discounted Terminal Value

*Risk-free 8
plus credit spread based on interest coverage ratio 8.02, credit rating AA
SYNERGY
Paramount  as   Paramount  to   Paramount  
 
stand-­‐alone   Viacom    to  QVC  

Cost  of  debt,  %   7,24   7,24   7,24  

Equity  beta   1   1,10   1,14  

Cost  of  equity,  %   12,25   12,9   10,7  

D/E   0,05   0,17   0,00  

WACC,  %   12,24   11,66   13,10  

OperaBonal  synergy,  mln  usd   n/a   2313   0  

SYNERGY VALUE 2’362
Financial  synergy,  mln  usd   n/a   49   -­‐44  
VS. -44
Share  price,  usd   71   91   71  

Share   price   (with   30%   acquisiBon  

n/a   118   92  
premium),  usd  

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CONCLUSION

•  PARAMOUNT-VIACOM potential merger looks

more attractive due to synergy, both operational
and financial

•  PARAMOUNT-QVC potential merger destroys the

value

•  In contrast to Smith-Barney valuation we assume

current level of industry average multiples, while
they forecast the increased range of multiples
due to the larger implied growth rates

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