Diller Makes a $1.26-Billion Deal for HSN

In a move that could advance his drive to build a new television network, media mogul Barry Diller said Monday that his Silver King Communications Inc. would buy Home Shopping Network Inc. in a stock swap worth $1.26 billion.

Analysts say the growing cash flow from the electronic retailer could help resource-poor Silver King expand its broadcast station group and develop programming for the envisioned network.

Diller, who is credited with building the Fox Broadcasting network for Rupert Murdoch, plans to replace the Home Shopping programming now running on Silver King’s 12 UHF stations with a combination of local news and entertainment to create an alternative network. Home Shopping should not suffer a decline in coverage because it is widely distributed on cable.

In addition to the 12 stations, Silver King is awaiting regulatory approval to take over the four Fox affiliates picked up in its purchase in November of Savoy Pictures Entertainment. It also owns minority interests in nine other stations, seven of which are Home Shopping affiliates.

Monday’s proposed merger goes beyond a plan announced in November under which Diller became chairman of Home Shopping and Silver King said it would buy the controlling interest in the network held by Liberty Media. Liberty holds 40% of the equity and 80% of the voting stock of Home Shopping.

Under the terms announced Monday, Liberty will retain 19.9% of the equity, with Silver King buying the remaining 80.1% and all of the voting shares.

“The only reason we didn’t do this in November is that I felt the shaky status of Home Shopping Network was not supportive of a merger,” said Diller, who took control of Silver King a year ago. “I had to be assured that HSN is viable, and now I am.”

On Wall Street, Home Shopping shares rose 12.5 cents to $11.375 on the New York Stock Exchange. The stock has traded as high as $15.625 in the last year and hit a record of $47 in 1987. Silver King shares fell $1.50 to $28 on Nasdaq, after rising into the high 30s after Diller took control.

Analysts say a combination of staff cuts, a change in merchandise and a reduction in the size of the inventory for increased efficiency has improved the performance of the 24-hour cable shopping channel since Diller stepped in. Sales jumped 16% in the first half, generating cash flow of $30 million, contrasted with a 10% drop in sales and a negative cash flow of $10 million in the same period a year earlier.

Ed Hatch, a media analyst at UBS Securities, projects cash flow of $70 million for the year on revenue of $1.2 billion, and plenty of room for growth, judging from the size of rival QVC, which has more than double Home Shopping’s cash flow on revenue of $1.6 billion. Diller spent more than a year as chairman of QVC after leaving Fox in 1992.

Home Shopping already dwarfs its new parent, which has $32 million in cash flow on about $45 million in revenue. With the merger, Silver King can borrow against Home Shopping’s cash flow to buy additional stations and finance program development. Silver King plans to begin replacing Home Shopping programming next summer, eventually rolling out programming on all its stations. Diller has hired a handful of high-level former Fox executives to devise a programming strategy, which he has promised to elaborate upon this fall.

Although the Silver King stations together with the Savoy stations reach an estimated 20% of the nation’s television households, their reach could vastly expand by applying federal rules that require cable operators to carry the programming of local broadcast stations. For instance, Silver King’s Long Island station could get picked up by Time Warner Cable in New York City.

But that is contingent on a favorable judgment in October by the Supreme Court, which is scheduled to determine whether to uphold the so-called must carry rules. Though analysts say there is little chance that the rules will be overturned, they say Silver King’s purchase of Home Shopping gives the broadcaster more leverage in dealing with cable operators in the event that the rule is suspended. Silver King could bundle the broadcast channel together with Home Shopping for cable operators and perhaps give them a cut of the merchandise sales or other enticements.

In addition, analysts say Silver King’s change in plans since November might have been motivated by regulatory hang-ups. The Federal Communications Commission, which must enforce rules on the cross-ownership of cable and broadcast properties, is said to have been uncomfortable with the terms of the deal struck in November because it would have given Liberty, an arm of the nation’s leading cable operator, Tele-Communications Inc., a huge chunk of equity in Silver King.

The deal announced Monday represents a curious reversal between the companies. Silver King was formed in 1986 as an arm of Home Shopping to distribute the channel’s programming. It was spun off to the public in 1992 by Home Shopping’s owner, Liberty.