Must Decide Which Units to Sell to Get FCC Approval of ABC Deal : Capital Cities Faces Regulatory Ordeal

The agreement under which American Broadcasting Cos. will be acquired by Capital Cities Communications Inc. raises a host of sticky regulatory issues that are likely to be hashed out with the Federal Communications Commission for months to come, analysts and broadcast industry observers said Tuesday.

With 12 television stations and 24 radio stations, the combined companies have enough properties to bump against each other in several markets, thus violating at least four FCC regulations.

An FCC spokeswoman said both ABC Chairman Leonard Goldenson and Capital Cities Chairman Thomas S. Murphy were in Washington on Tuesday to pay “courtesy calls” on the FCC commissioners, one day after announcing the proposed $3.5-billion deal.

In the opinion of many, the chief reason New York-based Capital Cities wants ABC is its five owned-and-operated television stations in most of the nation’s biggest markets. But WABC, ABC’s station in New York, is considered to have an audience “overlap” with WPVI, Capital Cities’ station in Philadelphia, and common ownership of those stations would probably violate the FCC’s rule against such overlap.

The FCC also prohibits broadcast TV networks from owning cable-TV systems, which would mean that Capital Cities would have to sell its giant cable division unless the FCC follows through with a proposal to eliminate the network cross-ownership rule. That proposal is currently open for public comment, with the commission’s mass media bureau expected to make a recommendation this summer.

According to an FCC spokeswoman, the merger’s toughest problem in clearing the agency is likely to come in situations where ABC now owns both TV and radio stations in the same locality, which includes Los Angeles, New York, Chicago, San Francisco and Detroit.

She said that such combinations are now prohibited by the FCC, although the agency made a “grandfather” exception for ABC and the other networks which owned them before the rule the took effect.

However, the FCC decided that, if such combinations were ever sold, they must be broken up, she said. For example, if the Capital Cities acquisition of ABC is completed, it would probably be forced to divest KABC-AM and KLOS-FM, ABC’s two radio stations in Los Angeles, and KLAC-AM and KZLA-FM, Capital Cities’ radio outlets here, if it wants to retain ownership of KABC-Channel 7.

In addition, the FCC prohibits the ownership of TV stations that reach in excess of 25% of the nation’s households. When ABC’s five stations, which reach 20.76% of the population, are combined with Capital Cities’ seven stations, the total of 28.55% violates the rule.

Figuring out which combinations of radio and TV stations the companies will elect to keep or sell “kind of boggles the mind as to the possibilities,” the FCC spokeswoman said.

Capital Cities could probably fetch from $60 million to $70 million for its smallest TV stations and as much as $600 million, or even more, for the Philadelphia station, analysts say.

According to Sharon Armbrust, who follows broadcasting for Carmel-based Paul Kagan Associates: “Capital Cities can easily afford this acquisition without selling anything, but because of government regulations they’ll have to.”

Some analysts have speculated that Capital Cities will put its cable systems, which have 375,000 subscribers in 16 states, on the market because of its negligible profit contribution compared to its broadcast properties.

However, Armbrust noted that the company “has done a whole revamping of their particular properties lately and, if they could get a waiver (from the FCC), I would be inclined to think they might keep it.”

Pointing out that the company purchased the bulk of its subscribers, or 210,000, for $139 million in 1980, she said the system is now “conservatively” valued at $350 million. “There’s a good deal of upside in it right now,” she said. “They’ve only been in cable for four years, and they’re now just getting to the point where they’re generating some good cash.”

Most observers believe that Capital Cities will sell its five smallest TV stations, including CBS affiliates in Fresno and Durham, N.C., and attempt to keep its two largest stations in Philadelphia and Houston. But keeping both would give the company 25.3% coverage of the nation’s households, a fraction over the allowed rule.

On Tuesday, Capital Cities said it was putting its WKBW-TV station in Buffalo, N.Y., up for sale.

According to analyst Anthony Hoffmann, who covers the broadcasting industry for Cralin & Co., the company could possibly receive a waiver for the Philadelphia-Houston stations on the grounds that population changes could bring the coverage down to 25% next year.

One industry executive, however, believes that it will be difficult for Capital Cities to get any waivers from the FCC. “If they made an exception here, the whole notion of constraints on ownership might start to erode,” he said.