Company Town : Time Warner May Seek 49% of NBC

Now that Time Warner appears to have the inside track in discussions over General Electric’s NBC, a minority deal may be the only way to keep federal regulators from the bargaining table.

Knowledgeable sources say that Time Warner could successfully skirt rules that prohibit cross-ownership of broadcast and cable properties by acquiring only 49% of NBC. That may explain why the media giant remains in serious discussions after Walt Disney Co. walked away from the table on Friday over GE Chairman Jack Welch’s refusal to sell the network outright.

GE is said to value NBC at $5.5 billion, based on an upsurge in advertising revenue and a renewed appreciation on Wall Street and in Hollywood of the Big Three networks as programming outlets. Sources say that Time Warner and GE are still attempting to work out the terms of a deal. Turner Broadcasting System and ITT Corp. are also said to be possible bidders for NBC. Nicholas W. Allard, a well-known communications lawyer in Washington, said Time Warner/NBC hasn’t appeared on the radar screen inside the Beltway yet due to other unfolding events such as Congress’ failure to pass new telecommunications legislation. But he said that any deal of that size is likely to draw some level of government attention, no matter how it’s structured.

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“This is yet another mega-deal that I’m sure the Federal Communications Commission will have a lot to say about,” Allard said. “But it’s not surprising that successful, muscular companies are looking for new alignments that will enable them to be even more competitive.”

Time Warner declined comment on the discussions, but sources say Chairman Gerald M. Levin is determined to make a deal happen, since NBC would provide a vital outlet for programming. Experts say there are at least four separate regulatory hurdles to overcome if he succeeds.

Since 1984, federal law has banned ownership of a broadcast TV station and cable TV systems in the same local market. In its largest cluster of cable systems, Time Warner provides service to nearly 1 million cable subscribers in New York City, where NBC also owns WNBC-TV. The New York market provides a compelling reason for Time Warner to settle for a 49% stake in NBC if that allows the companies to stay in both the cable and television business.

Until 1992, FCC rules prohibited any cross-ownership of national TV networks and cable TV systems. That year, the commission relaxed its rule to permit networks to own cable systems if the combination did not exceed 10% of the homes with cable available nationwide and 50% of such homes within a local market.

Both limits pose problems for Time Warner, whose cable systems are often available to more than 50% of the homes in a local market and to an estimated 13% of the nation’s 90 million homes within reach of cable. To compound matters, Time Warner recently struck a deal with Advance Publications and Newhouse Broadcasting that will give it effective control of an additional 1.4 million subscribers. Still, the FCC has promised to reconsider those rules in 1995.

Least troublesome, ironically, are the “financial interest and syndication rules” which kept apart studios and networks for more than two decades.

Those rules barred networks from selling off-network programming or owning any portion of the prime time shows not produced in-house. Networks are now allowed to own interests in network programming, but they are still prohibited from owning interests in first-run syndicated programs or from selling directly to TV stations in the United States.

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The FCC is widely expected to permit networks to enter the syndication business, however, when the rule is reconsidered to meet a deadline late next year. And observers say that any network merger or sale could take that long to close.

Time Warner is said to be well into planning its strategy for overcoming those obstacles in the event of an NBC deal, though the company declined formal comment. Andy Schwartzman, a public interest lawyer with the Media Access Project in Washington, said he’s still troubled by the magnitude of such a deal and would expect to see some sort of challenge mounted.

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“I don’t begrudge Time Warner trying to cope with the new (media) environment,” he said Monday. “But for the same reason that I thought it was important to restrain network power, I think it’s inappropriate to let a movie studio buy one of three major networks.”

Disney shares rose 75 cents Monday to $40.25 from Friday’s 1994 low, while Time Warner fell 50 cents to $36 and GE gained 87.5 cents to $49.25. Turner A shares added 37.5 cents to $18.625.

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On the other hand: While NBC may hope to avoid regulatory challenges in a deal with Time Warner, networks have also been known to use those regulations to their benefit.

In a complaint with the FCC, NBC is trying to head off a series of station purchases made through SF Broadcasting, a partnership involving Fox Broadcasting and Savoy Pictures, saying that Fox is trying to get around FCC limits on the number of stations it can own.

NBC is seeking to stop SF Broadcasting, which is 58% owned by Fox, from buying an NBC affiliate in Wisconsin. SF plans to buy four stations in all. Fox officials said that its passive investment in SF complies with all FCC regulations, and therefore stations acquired by SF don’t count against the total stations Fox is allowed to own.

Under FCC rules, networks cannot own more than 12 stations or own stations covering more than 25% of the market. Fox owns eight stations and plans to buy two more. It also is an investor in New World Communications, which has 12 network affiliates scheduled to become Fox affiliates.