Gemstar in Pact to Buy TV Guide for $7.6 Billion

In a deal that presages the sweeping changes coming for television viewers, Pasadena-based Gemstar International Group agreed to buy longtime rival TV Guide for about $7.6 billion in stock and said it will merge the nation’s leading print and electronic programming guides.

Although TV Guide, with 11 million subscribers, ranks among the largest-circulation magazines, Monday’s deal was motivated by point-and-click electronic program guides that will increasingly dominate how viewers pick their shows.

Gemstar and Tulsa, Okla.-based TV Guide are the leaders in selling interactive guides that allow viewers to sift through thousands of listings on their TV screens. Networks and advertisers hope such guides become a means to offer targeted pitches to TV watchers. Experts predict that by combining forces, the new guides will reach into American homes much faster.

The two companies have spent years battling over patents at the heart of the technology. The uncertainty created by that litigation has kept cable companies on the sidelines, unwilling to roll out a product that might be removed from the marketplace. Analysts now expect that situation to change.

“It’s great news for both companies,” said John Corcoran, an analyst with Stephens Inc. in Boston. “The interactive program guide will eventually become as ubiquitous as the remote control. It will also be the tool of choice for consumers to manage the intersection of TV, the Internet, telephony and a host of other interactive services delivered over cable and satellite.”

The deal underscores a major change in the way consumers will be viewing entertainment in the converging world of television and computers. Electronic program guides enable viewers to point and click their way through menus of shows based on topic, channel and time of broadcast. Some guides remember which shows have been watched before and use that information to recommend shows that viewers might like to watch in the future.

“A long time ago, a printed guide was very adequate,” said Henry Yuen, Gemstar’s chairman and chief executive. “With hundreds of channels or more, you need more responsive electronic program guides. Now with devices that allow you to do massive data storage and create personalized TV, there will be many [new products] to help people find out what entertainment they would like to view.”

Under terms of the agreement, Gemstar would buy TV Guide--controlled by News Corp. and AT&T;’s Liberty Media--with its highly valued stock and assume $600 million of debt.

While both Gemstar and TV Guide make electronic program guides, they have pursued different strategies for bringing their products to market. Gemstar’s technology is built directly into TV sets made by such companies as Philips, Thomson, Matsushita, Sony and Zenith. TV Guide, by contrast, has focused on cable and satellite TV operators. Earlier this year, the company struck a 10-year deal with AT&T;’s Tele-Communications Inc. to carry its program guide, but most cable firms have been reluctant to commit.

“A lot of [cable operators] have waited on choosing who they want to use as a guide because they were not sure who the winner was going to be, and they didn’t want to put something out and then have to replace it,” said Stacy Forbes, an analyst with Janco Partners in Denver.

That uncertainty created “a cloud over the shareholder value of both companies,” and they talked on and off for two years seeking a way to resolve the litigation, Yuen said. The companies negotiated a settlement in late 1997 and announced plans for a joint venture in January 1998, but the deal fell apart two months later.

Then United Video Satellite Group, the company that later bought TV Guide and adopted the name, launched a secret bid to buy Gemstar at $45 a share. After that failed, United Video went public with its offer, but Yuen rejected the price as too low.

In the 14 months since then, Gemstar’s fortunes, and its stock price, have improved substantially. Its shares are volatile, trading between $60 and $80 in recent months. The company’s annual profit nearly doubled in the 1999 fiscal year, reaching $74 million on revenue of $166 million. TV Guide, in contrast, had revenue of $598 million and profit of $65 million in fiscal 1998.

United Video, meanwhile, bought the TV Guide properties from News Corp. in January for $2 billion in cash and stock. But its stock has hovered around $40 and recently dropped below $30, allowing Gemstar to turn the tables and make a deal for its onetime suitor.

If the deal is approved by shareholders and regulators, Gemstar will swap 0.6573 of its shares for each share of TV Guide’s A and B classes of common stock. The offer represents a 9% premium for TV Guide based on both stocks’ prices at the close of Nasdaq trading Monday. After soaring to $88.50, Gemstar shares fell to $76.19. TV Guide gained 11% to close at $45.94.

Both companies said their boards of directors and several key shareholders support the merger, which will give TV Guide shareholders about 45% of the combined company. News Corp. and Liberty Media will each own about 20% of the combined company, which will take the TV Guide name.

Yuen said Monday’s deal came together after the judge hearing the patent dispute ordered both sides to make another attempt at resolving their differences.