Market Watch : Media Stocks May Recapture Their Star Billing : Entertainment: Now ignored by Wall Street, the securities may become hot properties again if federal rules are changed to allow network-studio mergers.

Media stocks, not too long ago the darlings of Wall Street, are now being shunned with all the fervor with which they were once embraced.

During the mid- to late 1980s, media stocks--which include movie studios, broadcasting companies, cable operators and publishers--were bid ever higher in the belief that their cash flows were stable and predictable and would continue to grow.

But all of that has changed. Recession-fearing investors, coupled with a seasonally weak third-quarter advertising market, have depressed media stocks below broader market indexes to make them what was once unthinkable: cheap.

The Dow Jones media group, an index of 17 stocks drawn from different media segments, has sunk about 18% so far in the third quarter, after recording a modest 4.4% gain in the second quarter. The Dow Jones industrial index is off 9.2% after gaining 6.4% in the second quarter.

Even the media group’s brightest stars are not shining like they used to.

Capital Cities/ABC Inc., considered by many analysts to be the best-run broadcasting company in the country, closed Friday at $476, down 25% from its 52-week high of $633. And Disney, which investors have considered the closest thing to nirvana on Wall Street, has seen its stock plunge 25% to close Friday at $102.375.

To be sure, media stocks are not immune from the broader market retrenchment caused by the Persian Gulf crisis, although perhaps they should be: All three networks report sharp upticks in viewing levels since the crisis broke in early August, particularly for their morning and evening newscasts.

One of the factors depressing the media stocks, especially cable companies, is the high debt levels accumulated during several years of merger frenzy. Transaction fever helped bolster stock prices.

The buying and selling of TV stations and cable systems has been at a standstill all year because the market will no longer finance highly leveraged transactions. But some anticipated changes in government regulations could open the door for another round of mergers and buyouts in the media business.

Those changes involve repeal or modification of the so-called financial interest and syndication rules. The rules, adopted by the Federal Communications Commission 20 years ago, in effect prohibit networks from owning studios, and vice versa.

A repeal or change in the fin/syn rules could substantially alter the media landscape. By allowing network-studio combinations, some analysts are foreseeing a round of buyouts over the next couple of years similar to the merger activity created by the deregulation of broadcasting in the early 1980s.

A studio-network is an appealing idea to many investors because it unites TV program buyers and sellers, who are continuously beating up each other over spiraling costs.

Network and studio executives agree that at least some kind of regulatory change is likely, although to what degree nobody knows.

Before deregulation of the broadcasting industry in the early 1980s, no one took seriously the possibility that a network would be sold. But within a two-year period, all three networks changed hands, beginning a painful process of down-sizing.

Favorite scenarios include Capital Cities/ABC Inc. merging with Paramount Communications Inc., General Electric Co. buying MCA Inc. and Walt Disney Co. buying CBS Inc.

The immediate consequence of any of the above combinations would mean uniting Hollywood program factories with national distribution systems. That idea is extremely appealing to some analysts.

“Disney is in the business of selling Disney from the cradle to the grave,” notes Ray Katz, leisure and entertainment analyst at Shearson Lehman Bros.

“A TV network is the most efficient marketing vehicle around--it gives you access to every household in the country. When you think about a marketing-driven company like Disney owning a marketing vehicle like a network, you see why Disney would want to own a CBS and probably outbid Paramount if it ever came to that.”

But analysts, many who assume at least one network-studio merger is a given in the post-fin/syn world, caution that there are factors mitigating against them, too.

“It’s easy to think there are going to be logical combinations: Capital Cities/ABC and Paramount, MCA and GE or Disney-CBS, which all the rumor mills are talking about,” states David Londoner, managing director of Wertheim Schroder in New York.

“You really have to look beyond those obvious combinations to the financial effects. And some just don’t hold up.”

For example, Londoner asks if it makes sense for Capital Cities/ABC, with a market capitalization of $8.5 billion, to buy Paramount and pay $6 billion for it ($50 per share). “How would you feel as a Cap Cities shareholder if you were either diluted by issuing new shares or leveraged by issuing new debt to go into a business as uncertain as the movie business?”

Londoner and some other analysts feel that, despite all the trumpeted “synergies” and “economies” frequently cited in possible network-studio combinations, studios still remain largely movie companies, and the networks want no part of being in the highly cyclical and volatile movie business.

A more likely scenario, some feel, is that a network may acquire a leading program syndicator, such as Cap Cities buying King World Productions Inc., which distributes “Wheel of Fortune” and “The Opra Winfrey Show.”

King World sells its programs to many Cap Cities-owned television stations, and the company is considered well run--a plus considering that Cap Cities likes its subsidiaries to operate independently. It would also thrust the network into a business that it presently is not in: the syndication of shows to local TV stations.

“King World is theoretically the ideal candidate,” says John Reidy, media analyst at Smith Barney, Harris Upham & Co. in New York. “But there are not many good independent TV production companies left, which would be the most likely to get snapped up.”

MEDIA MERGER BOOM, ROUND 2 Repeal of the so-called financial interest and syndication rules could pave the way for another round of big mergers among media and entertainment companies. Below are what analysts consider three possible scenarios and a peak at the combined profits such giants would generate. THE PLAYERS MCA Inc. Revenue: $3.38 billion Profit: $192 NBC (General Electric Co.) Revenue: $3.46 billion Profit: $605 million CBS. Revenue: $2.96 illion Profit: $296.3 million Capital Cities/ABC Inc. Revenue: $4.97 billion Profit: $485 million Paramount Communications Corp. Revenue: $3.91 Profit: $1.46 billion Walt Disney Co. Revenue: $4.6 billion Profit: $703.3 million THE SURVIVORS NBC (General Electric Co.) Walt Disney Co. Paramount ABC