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UPN swan song?

News Corp. deal could signal end for netlet

News Corp. pulled a fast one Friday, outbidding Viacom to buy giant TV station group Chris-Craft in a surprise deal that will fire-up the Fox station group and could hasten the demise of Viacom’s United Paramount Network.

UPN relies on Chris-Craft for coverage in big markets like New York, Los Angeles and San Francisco. But Chris-Craft’s affiliation deals with UPN, which the company co-owned (through its BHC Communications subsidiary) with Viacom until earlier this year, expire in January. And it’s doubtful that News Corp. would want to renew the station group’s relationship with the “Smackdown” net.

Such a blow would be enormous to the fledgling network, which is also programmed on Chris-Craft stations in Minneapolis, Phoenix, Orlando, Portland and Baltimore. (Additionally, the group owns an ABC affil in Salt Lake City and an NBC affil in San Antonio.) Without Chris-Craft’s eight UPN affiliates, the weblet would drop from 87% to 67% nationwide coverage.

Young match?

UPN could recover some of that distribution deficit by hooking up with Young Broadcasting. Young owns independent KCAL in Los Angeles as well as San Francisco’s KRON, which will shed its NBC affiliation in 2002.

But with no strong affiliate available in New York, and the price of maintaining its affiliations with the News Corp.-owned Chris-Craft affiliate astronomically high, Viacom may ultimately decide to shutter the weblet and instead program its 19 UPN outlets as independents.

“Those stations do need programming, but I don’t know if it’s worth (keeping UPN running),” said one exec close to the situation.

Viacom insiders insist that whether UPN lives or dies won’t have much effect on the conglom’s future.

“Either way, we’re OK. The programming has gotten better, but it’s still a money loser right now,” one said, noting that new Viacom prexy Mel Karmazin’s impatience with red ink is no secret.

Open on closing

Although some sources have suggested that Viacom might close the network down before the upcoming season even begins, it’s unlikely the plug would be pulled on UPN until News Corp.’s acquisition of Chris-Craft is finalized.

A quick shut-down is also unlikely given a number of factors heading into fall: UPN’s ad time was already sold at the May upfronts; affiliates must be given advance notice before the network goes belly-up; and network programming such as “Star Trek: Voyager” and “Moesha” — both of which are produced by Viacom companies — are set to go back into production.

But those concerns may only delay the inevitable. UPN execs, who recently announced plans to rechristen the web as “The Paramount Network” beginning in January, had been counting on a Chris-Craft acquisition by Viacom in order to keep the lights on.

The two sides have started up and broken off negotiations a handful of times over the past year and a week or so ago, Redstone and Karmazin put a final offer on the table.

“To be fair, they never accepted our price. But they never rejected our price,” said one Viacom insider.

Viacom issued a statement Friday morning that talks with Chris-Craft were off, sending Chris-Craft stock into a downward spiral. Late in the afternoon, a usually tight-lipped Chris-Craft countered with a rare press statement that it was in discussions with another major media company.

Hefty premium

News Corp. is understood to have offered about $3.7 billion or $85 a Chris-Craft share — a hefty premium considering the stock last closed at $62. The deal would include another $1.8 billion worth of Chris-Craft cash, pushing the formal value to over $5 billion. But that cash flows back to News Corp.

The company wasn’t commenting, but its board of directors met over the weekend to discuss the matter. The deal could be announced as early as Monday.

“This is a strategically brilliant move for News Corp. It’s beachfront property. These stations don’t come around that often,” said Merrill Lynch analyst Jessica Reif Cohen, who’s not concerned that News overpaid. “Fox has one of the best managed station groups in the business. This will change the balance of power,” she added.

Viacom had offered somewhere in the high $70-a-share range, sources said, and refused to budge on price even after Chris-Craft informed them late Thursday that it had another, better offer, although it didn’t say from whom.

“There are a lot of things the company would like to have, but not at any price,” Viacom Chairman-CEO Sumner Redstone told Daily Variety. “We’ve made it clear to Wall Street that we would not buy anything unless it was immediately accretive and the price was right,” he said.

Block buster

Chris Craft has been on the block for months and last fall hired investment bank Allen & Co. to sniff out a buyer. Allen banker Stanley Schuman is also on News Corp.’s board of directors and industry players saw Murdoch’s company as a definite contender.

But Murdoch said in November he was out of the running because Chris-Craft’s pricetag was too high and that he saw Viacom-CBS or Tribune as the likeliest buyers. According to some reports at the time, Chris-Craft was seeking $100 a share.

News Corp.’s bid is likely to reinforce Wall Street’s perception that it is a company that pays big, and sometimes overpays, for assets. Murdoch’s big-ticket items can be controversial, but often they help take his company to a new level.

The move comes precisely at a time when Wall Street is starting to look at News Corp. with a friendlier eye and anticipating the giant initial public offering of its worldwide satellite businesses later this year.

Third coup

The deal would also be News Corp. Chairman Rupert Murdoch’s third big station coup. The exec founded the fourth network after purchasing Metromedia’s band of six major market stations in 1985. Later, the net exercised its distribution power in the mid-’90s when Murdoch snatched up Ronald Perelman’s New World stations and moved those mostly-CBS affiliates over to Fox, again altering the network game.

The hookup could face obstacles in Washington, D.C., since it would put Fox over the current limit on station ownership. Rules today won’t let one group reach more than 35% of the nation’s TV audience and Fox’s 22 stations are already there.

But Fox and other broadcasters have been aggressively lobbying the FCC to raise the bar, arguing that competition from cable and other media makes the cap outdated. Execs have said they’re optimistic the 35% will fall by the wayside sooner rather than later.

Even if News Corp. had to swap or sell off some stations, it would still reap the benefits of a recent FCC decision allowing duopoly, or one company owning two stations in the same market but having them counted only once in terms of national coverage. Chris-Craft and News Corp. both own stations in New York, Los Angeles, Phoenix and Salt Lake City.

News Corp. was presumably attracted to the Chris-Craft stations’ valuable digital spectrum rights. With two analog stations in New York and Los Angeles, News Corp. will double the number of services it can offer in those markets once the digital revolution arrives.

The stations also give News Corp. new ammunition in the battle for TV sports rights. And in non-duopoly markets News Corp. could conceivably flip those stations to Fox Broadcasting.

That would ironically put Chris-Craft back in the Fox affiliate business. In 1988, Chris-Craft, displeased with low ratings and the loss of ad time during weekend primetime hours, yanked Fox programming from its Minneapolis outlet KMSP-TV, and KPTV Portland, Ore., which both later became UPN affils.

The mood is down

Sources say the mood was downbeat Friday at UPN, where some accused Chris-Craft of selling its stations to News Corp. rather than Viacom “out of spite.”

Chris-Craft and Viacom were uneasy partners in the UPN network. Early this year, Viacom forced Chris-Craft to hand over its half of UPN stake for a nominal $5 million. Chris-Craft had sued Viacom to stop that process and to block Viacom’s merger with CBS but lost in court.

The same day that Viacom triggered the so-called buy-sell provision in the UPN contract, it assured the Street that there were no pending discussions between the two companies.

But business being business, talks started up again over the summer, despite continued differences on price and the bad blood that had developed between Chris-Craft Chairman Herbert Siegel and the Viacom/CBS camp.

Viacom now appears to be definitively out of the picture. As Chris-Craft stock was tanking Friday, one big fund manager, Mario Gabelli, had faith another buyer would step in.

“Herb Siegel has always had a great deal of trouble doing deals,” Gabelli said. “But he’s a practical guy. He knows that 95% of a loaf is better than no loaf. So I don’t think we’ve reached the final chapter.”

Some investors on the News Corp. side applauded the deal for the heft it would lend Fox. The company will be paying Chris-Craft a healthy premium. The shares might have dipped to $62 Friday, but they had been buoyed for months by takeover speculation.

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