COMPANY TOWN: Creating a Media Giant : THE OTHER NETWORK : UPN Could Prove a Hurdle to the Merger

Viacom Inc.’s stake in struggling United Paramount Network looms as the biggest potential legal roadblock facing Viacom’s proposed merger with CBS Corp., federal officials said Tuesday.

The 1996 Telecommunications Act explicitly bars any of the big four broadcast networks, including CBS, from merging with one another or with an emerging network such as UPN.

Viacom co-owns UPN in a 50-50 deal with television station operator Chris-Craft Industries. At a news conference Tuesday, executives with CBS and Viacom indicated that the merged company would attempt to keep the UPN stake.

“We don’t think in a multichannel world with the Internet . . . owning two networks is a problem,” said CBS President and Chief Executive Mel Karmazin.

UPN is the lowest-rated broadcast network this season, and the uncertainty stirred by the proposed CBS-Viacom merger could hinder UPN’s efforts to attract the programming it needs, analysts said.

But Dean Valentine, UPN’s president and chief executive, said the merger would actually be a boon for the West Los Angeles-based network.

“This has energized and rejuvenated us,” Valentine said. “The new company is a very big company with a lot more opportunities for distribution and production. It will give us tremendous reach.”

Valentine also stressed that UPN’s modest level of programming--10 hours of prime time versus the 22 hours of the major networks--puts it in a different class and may be grounds for an exemption to the two-network ban.

But federal regulators are implying otherwise. UPN, whose new wrestling program and urban comedies such as “Moesha” are its strongest offerings, was specifically mentioned as an emerging network in the 1996 regulations. Also UPN clearly meets the definition of a broadcast network because it nationally broadcasts more than four hours of programming a week, said Rosemary Kimball, a Federal Communications Commission spokeswoman.

“The rules are clear,” Kimball said. “You can’t own two broadcast networks, and CBS and UPN are broadcast networks.”

What isn’t clear, however, is what it means to “own” two networks. When UPN came to life in January 1995, Viacom agreed to split the network’s anticipated losses with Chris-Craft’s subsidiary United TV and to sell UPN one of its top shows, “Star Trek: Voyager.” The next year, Viacom bought half the network from Chris-Craft for $160 million.

Now that Viacom owns half of UPN, the question may ultimately come down to whether it’s against the rules for the proposed Viacom-CBS to own 1 1/2 networks.

“We haven’t quite figured that one out yet,” said a senior FCC official on Tuesday. “That will be an issue we will look at closely.”

Karmazin and Sumner Redstone, chairman and chief executive of Viacom, said they planned to meet with federal regulators today to discuss the proposed merger.

Another key regulatory issue the executives will confront is market share. The FCC currently forbids a company to reach more than 35% of the 100 million U.S. homes with TVs. Karmazin and Redstone boasted at Tuesday’s news conference that CBS, which owns 15 TV stations, and Viacom, which owns 19, will together reach more than 40% of the U.S. market. Karmazin said the companies would urge the FCC to relax the rules.

“We have said for a long time that these rules are outdated,” Karmazin said.

Some industry analysts predict that federal regulators will cut a deal with Viacom-CBS, especially on the market-share limit.

“The [35% limit] is not absolute. The FCC is free to move to a higher number,” said Phil Verveer, who served as chief of the agency’s broadcast division in the late 1970s.

If federal regulators prohibit Viacom-CBS to continue to own half of UPN, several things could happen, said Derek Baine, a TV analyst with Paul Kagan Associates. The combined company could structure a deal with Chris-Craft for reduced ownership of UPN and clear itself of being considered an owner of the network. Similarly, Viacom-CBS could trade its stake for equity in Chris-Craft.

Or, most drastically, the new company could push to shut down lackluster UPN and shift its best shows to CBS, Baine said.

Chris-Craft, which owns 10 TV stations, including KCOP-TV Channel 13 in Los Angeles, has had to pump in at least $300 million to keep UPN afloat, analysts said. New York-based Chris-Craft had no comment on the effects of the merger, a spokesman said.

If it goes through as planned, the merger may be UPN’s last hope, Baine said.

“You can’t go on forever with ratings like they’ve had,” he said. “It seems to me like they’re going to give UPN a chance under the new company, but if UPN puts on another season of bombs, I don’t see this going on.”

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Times staff writer Jube Shiver Jr. contributed to this report.

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Deal Fallout: Rally in Media Stocks

Media and entertainment stocks were broadly higher Tuesday in the wake of the CBS-Viacom deal. The biggest gainers were other owners of radio and TV stations--including Chris-Craft, Sinclair and AMFM--and Westwood One, which operates a radio network. A look at major media and entertainment issues:

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Ticker 52-week* 52-week* Tuesday Tuesday Pct. Stock symbol High Low close change change Westwood One WON $43.25 $15.50 $46.00 +$5.00 +12.2% Sinclair Broadcast. SBGI 21.50 6.75 18.56 +1.94 +11.7 Chris-Craft CCN 53.50 38.63 57.00 +5.56 +10.8 AMFM AFM 59.38 18.63 53.00 +3.50 +7.1 Paxson Commun. PAX 17.44 5.19 15.81 +1.00 +6.8 Clear Channel CCU 76.00 31.00 76.19 +4.56 +6.4 Fox Entertainment FOX 30.00 19.38 25.13 +1.25 +5.2 Viacom (Class B) VIA/B 49.19 25.31 46.94 +1.88 +4.2 Univision UVN 78.38 21.06 81.00 +2.81 +3.6 CBS CBS 50.44 18.00 50.69 +1.75 +3.6 General Electric GE 120.00 69.00 119.81 +3.41 +2.9 Walt Disney DIS 38.69 22.50 28.69 +0.75 +2.7 Cox Radio CXR 60.75 26.25 54.50 +0.94 +1.8 Time Warner TWX 78.63 37.56 62.25 +1.06 +1.7 News Corp. NWS 37.63 20.19 29.88 +0.31 +1.1 Seagram VO 65.00 25.13 53.31 Unch. Nil

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* 52-week high prices don’t include Tuesday trading

Source: Reuters