American Broadcasting Cos. Inc., beset by declining ratings, the threat of corporate raiders and an uncertain management succession, Monday agreed to be acquired by Capital Cities Communications Inc., a much smaller broadcasting and publishing firm, in a deal valued at more than $3.5 billion.
If completed, it would be the first acquisition ever of one of the three big television networks. The deal requires approval by the Federal Communications Commission, among other regulatory bodies, and both companies said that they expect to sell off some of the 12 TV stations and 21 radio stations that the combined firm would own in order to satisfy newly liberalized restrictions on ownership of broadcast outlets.
Los Angeles Outlets
In Los Angeles, ABC owns KABC-TV and radio stations KABC-AM and KLOS-FM; Capital Cities owns radio stations KZLA-AM and -FM.
A takeover of ABC by New York-based Capital Cities, respected in the television industry for its cost-cutting and efficient operations, could portend changes in direction for the TV network, whose profits have suffered recently. But officials of both companies insisted that ABC would continue to be managed by its current officers as a separate subsidiary of Capital Cities, which would change its name to Capital Cities-ABC Inc.
According to a joint statement by the companies, the deal includes participation by Warren Buffett, an Omaha financier who is considered one of the nation's richest men. Buffett, who made most of his fortune through stock investments, agreed to pay Capital Cities more than $500 million to help finance the ABC purchase in exchange for an 18% stake in the combined companies and a seat on the board of directors. His precise role in the deal and in management of the combined companies was not clear, however. He could not be reached for comment Monday.
Although ABC executives insisted that the decision to sell was not based on the threat of an "unfriendly" acquisition of the company by corporate raiders, ABC has been a rumored takeover target for months, partly because its stock has been trading at lower than the value of its assets. On Monday, news of the acquisition sent the price of ABC shares soaring on the New York Stock Exchange. The stock closed at $105.875 a share, up a whopping $31.375 from Friday.
In addition, the news sent the prices of other broadcasting stocks up sharply, as analysts speculated that the other two networks--CBS and NBC--could now be vulnerable to takeovers.
Last month, the stock of CBS Inc. rose substantially on talk--never directly confirmed--that cable-TV entrepreneur Ted Turner might be interested in acquiring the company. Also, a conservative group led by Sen. Jesse Helms (R-N.C.) has been attempting to woo enough CBS shareholders to its viewpoint to elect a director at next month's annual shareholders' meeting.
"It's now likely something is to emerge with CBS. This breaks the ice," said Edward Atorino, an analyst with the New York investment firm of Smith Barney, Harris Upham & Co.
ABC's chief asset--its TV network--was the last of the three national TV networks to be founded, but it rose to become the top-rated network in the late 1970s. Last fall, however, the network fell to third in the ratings, and its failure to recover has weakened ABC's profits and standing among Wall Street analysts. Last week, the company announced a major shake-up of top network management, apparently to deal with its problems.
ABC Chairman Leonard H. Goldenson, 79, insisted in a telephone interview that the ratings problems, corporate raiders and a lack of a likely successor for him did not influence the decision to sell "per se." He said that the need to keep abreast of technological changes in the fields of broadcasting and publishing made a merger of ABC and Capital Cities a logical move.
Terms of the deal call for each ABC share to be purchased by Capital Cities for $118 cash plus one-tenth of a warrant that would entitle the holder to purchase Capital Cities common stock at a set price. Each whole warrant would entitle the holder to buy one share of Capital Cities common stock at $250 per share. For a period of 90 days after the merger, holders of the warrants would have the right to sell them back to Capital Cities for $30 each.
At the time of the merger, Buffett's company, Berkshire Hathaway Inc., will buy 3 million unissued shares of Capital Cities stock, for $172.50 a share, or a total of $517.5 million. Buffett, 54, whose personal fortune is estimated at $665 million, would be elected to the Capital Cities board at that time.
Officers of New Firm
The companies said that Capital Cities Chairman Thomas S. Murphy, 59, would become chairman of the combined companies, with Goldenson serving as chairman of the executive committee. Frederick Pierce, 52, ABC's president, would become vice chairman of the combined companies and chief executive of its ABC Inc.
Goldenson said that, as far as ABC's operations and management goes, "Everything is going to be carried on as is."
He was first approached about the merger by Murphy last December. The two men have had a professional and personal relationship for 25 years, Goldenson said. Analysts speculated that Goldenson may be eager to retire and wanted to leave the company in strong hands.
A spokesman for the FCC said Monday that, because the acquisition involves broadcast licenses, "they will have to seek our consent." A key issue will be how the companies propose to deal with federal cross-ownership restrictions, which limit ownership of television and radio stations in the same city, as well as ownership of TV and cable television stations in the same area and ownership of broadcast and newspaper properties in the same city.
Owns 5 TV Stations
ABC owns five very profitable television stations in big markets--New York, Los Angeles, Chicago, San Francisco and Detroit. Capital Cities owns stations in other markets, and analysts suggested that the combined companies are likely to sell some of the former Capital Cities stations in order to meet FCC restrictions.
Last December, the agency liberalized its ownership rules to permit a single company to own up to 12 TV stations and 12 radio stations. That replaced its old limit of seven, but the FCC prohibits one owner's stations from reaching more than 25% of the nation's audience.
ABC's Pierce said Monday that the combined ABC and Capital Cities stations would reach an estimated 28% of the nation's audience, which would hence require some divestitures. The companies would not say Monday which properties they intend to sell.
In addition to its TV network and broadcast stations, ABC operates seven radio networks and owns a publishing business and a film-making company. Capital Cities owns Fairchild Publications, which publishes Women's Wear Daily, among other trade newspapers, and the Kansas City Star.
ABC reported 1984 revenues of $3.7 billion and profits of $195 million. Capital Cities reported revenues of $939.7 million and profits of $135.2 million.
Capital Cities Communications is generally regarded as a tightly run company. Part IV, Page 1.
Staff Writer Penny Pagano contributed to this article.