Fox in the UPN house - Broadcasting & Cable

Fox in the UPN house

News Corp. snatches 10 Chris-Craft stations for $5.4B, the most daring duopoly deal yet
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Rupert Murdoch just can't help himself. He's just not happy if he doesn't rattle the broadcast industry to its core every three or four years, as he has since 1986 when he launched the FOX network. Last week, he did it again, sending tremors through the business with an industry-transforming deal: the acquisition of Chris-Craft Industries and its 10 TV stations for $5.4 billion ($85 a share) in cash and stock.

With Chris-Craft, FOX would make the biggest, baddest duopoly play since the FCC legalized dual-station ownership in big markets last year. "You have to deal with us," if you are an advertiser or syndicator in one of its duopoly markets, boasted FOX stations chief Mitch Stern in the afterglow of Monday's announcement.

Indeed, FOX made the duopoly move that Viacom had talked about almost since its merger with CBS. Viacom's negotiations with Chris-Craft were frequently strained, snuffed out and rekindled several times. As late as Aug. 10 it appeared Chris-Craft was close to selling out to Viacom, for a price sources say was just under $80 per share. And then FOX, having passed once, jumped back in at the higher price.

The deal touched off intense speculation about the fate of Viacom's UPN, with many predicting the network's demise. A one-time half-owner of UPN, Chris-Craft has affiliates in eight of the top-25 markets. So, the reasoning went, how could stations owned by FOX support a rival network-particularly one that appeals in large part to the same young male audience?

But with his preemptive strike, Murdoch seems more intent on cutting himself in on the nation's sixth over-the-air network than in killing it. He insisted that he wants UPN to thrive-possibly with FOX as a partner.

"We're not urging CBS to close down UPN at all," Murdoch said. "We'd like to see that developed, maybe with us as a participant.'' He left room to wiggle. It's "very early'' yet, he said.

Viacom sources confirm that talks with FOX have occurred and will continue, but not just about a possible UPN venture. Station swaps are being discussed, as well as other possible ventures. Murdoch confirmed FOX has had "informal contact with CBS" concerning the future of UPN.

More intriguing, Murdoch said he could replace UPN with a second network of its own. "We'd like to see the successful development of that sixth network," he said. "Others may walk away from it, but we won't."

The deal will take between nine and 12 months to close, FOX said last week, and either party can walk if it hasn't closed in 15 months. There is no breakup fee, which enables Chris-Craft to consider other offers. Viacom is said not to be considering a higher offer. And sources say FOX is prepared to sweeten its bid-past $90 per share-to complete the deal.

Options, options everywhere

While the company is open to the possibility of operating UPN in a venture with Viacom, News Corp. President Peter Chernin said it has many other options for programming the Chris-Craft stations. But at the end of the day, he said, "I don't think we care enormously," whether UPN lives or dies. "We have multiple opportunities, whether it be as a UPN affiliate or to run these as independents that share news and sports and use more FOX product."

Others note that FOX launched its network 15 years ago because it saw a real upside to running stations as affiliates, not as independents. (And 15 years ago, a lot of people thought Murdoch was crazy to think he could start a fourth network.)

But during a conference call with analysts last week, Chernin couldn't help tweaking Viacom's top two executives, suggesting that closing down UPN just because they lost out on the Chris-Craft deal would be dishonest. "Both Sumner [Redstone] and Mel [Karmazin] have spent a large chunk of time in Washington arguing why they want to have two networks and why they want to have two voices for diversity," said Chernin. "I'll assume they'll keep it going, if they're true to their word."

UPN is credited with programming for the underserved African-American audience with shows such as Moesha, one of the networks first hits. But it also targets young men with shows like the WWF Smackdown and, starting in January, XFL football.

Like FOX, Viacom executives said they were eager to at least explore the possibility of keeping the Chris-Craft stations affiliated with UPN. The affiliation agreements between the eight Chris-Craft stations allied with UPN expire in January.

Shortly after Murdoch made his comments last week urging Viacom not to shutter UPN, the network issued a letter to affiliates that it hoped would quell any panic that had taken root in light of the Chris-Craft transaction.

In the letter, UPN said it hoped to renew the Chris-Craft stations to long-term affiliation contracts. "We are confident that UPN will continue to succeed in the long term and will bring increased value to any stations affiliated with the network, be they Chris-Craft, News Corp. or anyone else."

UPN has contacted its major advertisers to "reassure them that at least for this broadcast year, we'll be there," said Mike Mandelker, the network's head of sales. Commitments for the fourth quarter are firm anyway, but Mandelker said none of his clients had pulled any advertising. "They've all been supportive."

Paramount stations need UPN

Whether UPN's letter had a calming effect was unclear. Dave Hanna, chairman of the UPN affiliate board of advisers and president of Lockwood Broadcast Group, which operates WUPV(TV) Richmond, Va., said, "I'd be lying if I said that everybody didn't have an [unsettling] initial reaction. There's been some concern." But he said the affiliates he's talked too aren't in panic mode. "It's too early for that, and I don't think anybody knows how this whole thing is going to shake out."

If the Chris-Craft stations don't re-up, UPN has other intriguing options, including possibly signing the Young stations in Los Angeles and San Francisco. Another possibility is aligning with USA Networks Inc. Barry Diller has confirmed he wants a partner for his broadcast station group, which has outlets in seven of the top-10 markets, including the top four.

"I don't believe Mr. Karmazin paid all the money he paid for 19 television stations as part of the Paramount station group family to not have a network affiliation," Hanna said. In fact, he said, the valuations of those stations would be "slashed" if UPN suddenly went dark.

UPN President Dean Valentine concurs. "Mel likes UPN, and I think Mel would like for us to stay alive," he says. "It's not like anybody is rushing to figure out a way to shut it down. People are rushing for ways to find how this asset can grow."

Valentine says that UPN had a 48% increase in upfront sales, to $170 million (excluding the WWF, which is sold by the WWF). Others say that UPN's losses are getting smaller-they will shrink from $180 million in 1998 to under $100 million in 2000.

But others are fanning the flames of the UPN doomsday scenario, not the least of whom is UPN competitor Bud Paxson, who runs start-up network PAX TV, in partnership as of last year, with NBC.

The FOX deal will likely mean the end of the line for UPN and a big boost to his network, Paxson said. "I just think this is extremely good for our industry, and I think it is also the demise of the Paramount Network.and then there were six."

But not for long. Paxson said he believes Murdoch will opt to develop a second FOX network, as opposed to venturing with Viacom on UPN.

Duopoly is the key

Despite all the talk about UPN, the deal's big drivers-from a revenue-and-profit standpoint-are the duopoly opportunities. Four come with it-in New York, Los Angeles, Phoenix and Salt Lake City. In Salt Lake City, both the Fox and Chris-Craft stations are among the top four most-watched stations, and, therefore, joint ownership is barred. Fox said it would dispose of Chris-Craft's ABC affiliate there.

According to Fox's Stern, in just the top two markets, the group will generate $1 billion in revenue and $500 million in cash flow in 2002 after adding Chris-Craft's wwor-tv New York and kcop-tv Los Angeles to the fold. That's as much as the entire 23-station Fox group made in 1997.

The numbers demonstrate the huge lift in sales and profits that dual-station ownership brings to bear in a television market and why Fox is a big believer in the duopoly strategy. Indeed, Stern said that the company intends to create as many as 15 duopolies by the time it closes the Chris-Craft deal and swaps and sells stations to comply with the station-ownership cap. That cap limits any group to covering no more than 35% of the nation's 100 million TV homes.

For big groups, the beauty of duopoly is twofold: It dramatically increases ad-revenue share at a fraction of the cost, and a second station in a market doesn't count against the cap.

Fox will have to do a lot of swapping and selling to remain under the cap. It's already at the 35% limit and buying Chris-Craft will bump it 40.5%. Fox will need to dispose of stations covering at least 1.2 million U.S. TV households to get back under the cap.

Stern said that even if the cap were lifted to 40% (which won't happen unless George Bush gets elected president), if it's a choice between extending reach or doing duopolies, Fox will take the duopolies. That's because the profit margins are higher. Fox's average profit margin is already approximately 50%. But its one current duopoly, in Dallas, has a margin of 60%.

"We think this is going to be the standout duopoly deal in broadcasting," Stern told financial analysts last week. "We think that the same way we redefined the business with the New World transaction, we're going to redefine the business with the Chris-Craft acquisition." Fox doubled New World's profits in two years. The New World deal helped Fox win the rights to the NFL, which helped solidify its status as a "major network."

But it's not just duopolies. When the regional sports networks are considered, some Fox markets will have triopolies and in the case of Los Angeles, where Fox has two sports networks, a "quadopoly." Stern said Fox already has 15 markets where it cross-sells between TV and regional cable networks. "In Los Angeles, we'll have more sales leverage than anyone in any market in the country."

Turning around the Chris-Craft stations, which has profit margins in the mid-30% range, said Stern, should be easier than turning around the New World properties, because of the cost savings of running two stations in a market.

"You can run a second station with 5% to 15% of the manpower of the primary station and 2% of the equipment," said Stern. The profit margins of Fox's duopolies should average between 55% and 65%, he said. This year, the Chris-Craft stations will earn $180 million in cash flow. By 2002, the first full year they'll be under Fox ownership, that number should rise to $300 million.

Postpartum?

Murdoch may have a tough choice in New York-sell his beloved and right-wing New York Post or forgo a TV duopoly. From a dollars-and-cents standpoint, it's a no-brainer. It's better to own Fox's wnyw(tv) and Chris-Craft's wwor-tv than to own wnyw(tv) and the Post. But Murdoch is fond of having the editorial punch provided by the Post. Washington insiders say he won't get another waiver of the newspaper-TV cross-ownership rule that now allows him to own the Post and wnyw(tv).

Some saw last week's deal as the revenge of Chris-Craft's Herb Siegel. After a legal tussle over a buy-sell option, Chris-Craft was forced to sell its half interest in UPN to Viacom for a paltry $5 million. That's for a network in which Chris-Craft had already invested $400 million over the last five years.

To make matters worse, it seemed then that the only company interested in buying out Chris-Craft was Viacom-for a price well below the $100 a share that Herb Siegel was looking for. If the deal does go through, for the $85 per share price that Fox has offered, the Siegels-Herb and his two sons Bill and John, who help run the business-stand to make close to $2 billion.

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