Partners in the proposed merger of Showtime and The Movie Channel plan to meet soon with Justice Department officials to try to salvage the deal rather than attempt to restructure it with other companies, officials said today.
"I am very happy with the partnership," said Terrence A. Elkes, president of Viacom International Inc., owner of Showtime. Elkes said the partners in the venture are going to hold off on completing the deal to avoid challenging the Justice Department to a court fight.
Disclosure of the effort to salvage the deal follows a long weekend of talks among entertainment executives after last Friday's Justice Department announcement that it plans to file a suit to block the pay television combination.
Although not unexpected in light of an earlier disclosure of staff opposition to the deal, the decision of the assistant attorney general for antitrust, William Baxter, to go after the Showtime-Movie Channel combination set off tremors throughout the entertainment business.
The venture was part of a continuing effort by Hollywood to secure a niche in pay television and to begin to erode the dominant position of Home Box Office Inc.
The plan was to merge the American Express Co./Warner Bros. Movie Channel, now the fourth-largest pay service with 2.4 million subscribers, with Viacom's Showtime, the second-largest with 4.2 million viewers. Paramount Pictures and Universal Studios are planning to buy into the venture.
HBO, owned by Time Inc., is three times as large as Showtime and Time's companion all-movie service, Cinemax, which is slightly larger than The Movie Channel.
Sponsors of the cable venture were optimistic that it would win approval by Baxter, who opposes government action against mergers involving different levels of production or distribution.
But industry sources said today that, in fact, the vertical nature of the cable venture had played a dominant role in the development of the Justice Department position.
According to one knowledgeable source, the argument against the combination focused on the potential for collusion among the studios on how they would market their product to pay television and on the links between the dominant sources of film programming, the studios, and the major source of pay distribution, the cable outlets.
The merger partners wanted Justice to considered the deal in the context of a broader market that includes the television networks, which are competing for the same television audience. That would have made the merger appear less threatening.
Dennis Leibowitz, an analyst with Donaldson, Lufkin & Jenrette, says he expects Showtime to earn about $20 million this year, up from about $13 million last year. The Movie Channel has been slightly profitable since the third quarter of 1982 and has made money in every quarter since, according to John A. Schneider, president and chief executive of Warner Amex Satellite Entertainment Co.