NEW YORK (CNNfn) - News Corp., the Australian owner of the Fox television network, grabbed an unparalleled leadership position in the two largest U.S. television markets Monday, agreeing to buy Chris-Craft Industries Inc. and its 10 television stations for nearly $5.4 billion in cash and stock.|
The deal gives News Corp. (NWS: Research, Estimates), owned and controlled by media mogul Rupert Murdoch, control of 13 television stations in the nation's top 10 television markets, including a duopoly -- or two stations -- in the top two markets, New York City and Los Angeles.
The agreement would provide the company, through its subsidiary Fox Entertainment Group, unprecedented leverage for programming and media advertising in those markets, particularly in Los Angeles, where it would own two broadcast stations and two sports networks.
"It's not that often that assets that are this attractive, this complementary and this scarce come on the market," said Peter Chernin, president and chief operating officer of News Corp.'s U.S. operations and Fox Entertainment Group. "We think this deal will position us for long-term leadership in television content."
"In L.A. ... there is no advertiser that is going to [be able to] go around us," said Mitch Stern, chairman and CEO of Fox television stations. "In New York and L.A., you will also be able to [obtain] any syndicated show we develop or be able to buy any show that's put out by any studio. You are just going to have to deal with us. The benefits are going to be dramatic."
UPN's future in doubt
The deal calls into question the future of the UPN network, which Viacom (VIA: Research, Estimates) acquired outright from Chris-Craft for $5 million earlier this year.
The affiliate agreements for the stations acquired by News Corp. Monday, eight of which distribute the UPN network, come up for renewal in January. Many analysts believe those affiliations will be switched to Fox-oriented programming.
"I'm not sure I know what will happen to (UPN). I think that's a more appropriate question for Viacom. I assume they will keep it going," Chernin said. "I don't think we care enormously. I think we care if we have affiliates ... but we have multiple ways to go."
Up until late last week, Chris-Craft (CCN: Research, Estimates) was in merger discussions with Viacom, owner of the CBS Television Network and Chris-Craft's former partner on the UPN network. But Viacom pulled out when Chris-Craft's price tag moved too high, igniting the talks with News Corp.
Still, analysts largely commended Viacom for not pursuing a merger that would hurt its earnings, and said investors likely would not punish the company's stock for backing out. UPN remains a drag on Viacom's profitability, so even if it were disbanded, Viacom's net cash flow would increase by some $100 million annually, some analysts said.
"[Viacom President] Mel Karmazin indicated last week he would not do a dilutive acquisition," said Christopher Dixon, media analyst with PaineWebber. "This really demonstrates the discipline that that management team has. It's unfortunate that they were not able to get the asset, but by the same token, it's kind of nice to hear that someone is going to walk away if the price gets too expensive."
The merger places renewed pressure on the U.S. Federal Communications Commission to further loosen rules that govern how much of the nation's broadcast airwaves one company can control.
The FCC already has adjusted federal regulations that now allow media companies to own two television stations in the same market.
However, FCC laws still restrict one company from having access to more than 35 percent of the nation's broadcast audience. Monday's deal would push News Corp.'s access about 40.5 percent, meaning it likely will have to divest or swap some stations unless the rules are changed.
All four of the nation's largest broadcast networks have petitioned the federal agency for such changes, but the FCC isn't even expected to rule on whether it will consider the matter until this Fall at the earliest. News Corp. expects the acquisition of Chris-Craft will take about a year to close.
Federal laws also prohibit one media company from owning a newspaper and television station in the same city, as News Corp. does in New York, unless it receives an FCC waiver.
News Corp. already applied for and received a waiver once to own the New York Post and the local Fox affiliate there, and analysts were uncertain whether it could do so again in order to add a second television station to its portfolio. The FCC has only approved three such waivers, and each time the company had to prove that one of the entities would likely go out of business without the merger.
"We think there are so many strong media voices in the New York market ... that we believe this deal is absolutely within the spirit of what the FCC is trying to achieve," Chernin said.
Terms of the deal
Terms of the transaction call for News Corp. to pay more than $2.1 billion in cash and issue about 73 million of News Corp.'s preferred American depositary receipts (ADRs) for New York-based Chris-Craft. Shareholders will get $34 cash and 1.1591 News Corp. ADRs for each of their shares.
Based on Friday's close, that values the company at $85.15 a share, a premium of 38 percent over Chris-Craft's Friday's closing price of 62.
As part of the transaction, News Corp. also agreed to purchase BHC Communications, which is 80 percent owned by Chris-Craft, for $66 in cash and 2.2278 preferred News Corp. ADRs for each share. It also acquired United Television (UTVI: Research, Estimates), which is 58 percent owned by BHC Communications, by swapping $60 in cash and 2.0253 preferred ADRs for each share.
Fox Entertainment Group (FOX: Research, Estimates) will issue roughly 122.2 million of its shares to News Corp. in return for the acquired company, giving its Australian parent a more than 85 percent stake in the diversified media company.
The deal is structured to be a tax-free transaction, however should the IRS rule it should be taxed, it will still go forward with Chris-Craft shareholders receiving the equivalent of an extra $5 per share in cash and stock, News Corp. officials said.
News Corp. said the deal would add to earnings per share immediately. Chernin said the agreement contained no break-up fee, but there also was no collar on the exchange ratio to protect Chris-Craft shareholders should News Corp.'s ADRs take a hit.
In addition to New York and Los Angeles, Chris-Craft owns stations in Dallas, San Francisco, Baltimore, Minneapolis/St. Paul, Phoenix, Orlando, Fla., Portland, Ore., Salt Lake City, and San Antonio. The Salt Lake City station is an ABC affiliate and likely will be swapped for a station in a different city, Chernin said. The San Antonio station is an NBC affiliate.
Despite falling early in the day, News Corp. shares rebounded to close up 3/8 to 50-1/8 Monday, while Chris-Craft soared 17 to 79. Fox shares gained 3/8 to 30-1/16 while Viacom shed 9/16 to 71-3/8.