NBC Is Near Deal to Buy Telemundo

General Electric Co.’s NBC television network is close to finalizing a $2.1-billion acquisition of Telemundo, the nation’s second-largest Spanish-language television network, sources close to the negotiations said Monday.

Although talks could still fall apart and another bidder could materialize, sources said the remaining details should be worked out within a few days.

NBC emerged as Telemundo’s only remaining suitor late last week, after months of negotiations that also included a bid from Viacom Inc., which owns the CBS television network, and early interest from Walt Disney Co., which owns ABC.

NBC, which is offering cash and GE stock, also would assume $700 million in Telemundo debt. Telemundo is owned by Sony Corp., Liberty Media Corp. and several smaller investors.

Spokespersons for Sony, NBC and Telemundo declined to comment.

Telemundo owns 19 television outlets, 10 of which are low-power stations. In addition, the Telemundo network has 40 broadcast affiliates. Five of Telemundo’s full-power stations are in cities where NBC already operates. The overlapping markets are some of the nation’s largest cities: New York, Chicago, Miami and Los Angeles.

The proposed purchase is a milestone for NBC, which mostly sat on the sidelines during a period of frenzied media consolidation in the 1990s. The deal would make NBC an immediate player in the fastest growing advertising segment: Spanish-language media. Latinos make up more than 11% of the U.S. population and are projected to become the nation’s largest ethnic minority within the decade.

Some Wall Street analysts said that, at $2.8 billion, including debt, NBC was paying too much for Telemundo. After all, Sony and Liberty bought their stakes in the fledging network in 1997 for $539 million.

In addition, Colorado-based Council Tree Hispanic Investments last year paid $181 million for an 18% stake in Telemundo, placing the network’s overall value at the time at $1.1 billion.

“If the current owners of Telemundo--Sony, Liberty Media and Council Tree Hispanic Investors--get $2 billion or $2.7 billion, they’re going to be incredibly happy,” said David Joyce, senior equity analyst with Miami-based investment banking firm Guzman & Co. “That’s quite a return.”

David Miller, a Los Angeles-based media analyst with Sutro & Co., placed Telemundo’s value at $1.6 billion to $1.8 billion. Telemundo’s $3-billion asking price probably is what chased away Viacom, which also submitted a bid by last week’s deadline, Miller and other analysts said.

“Given the heat that Disney has been taking for its acquisition of Fox Family, Viacom doesn’t want to be sitting in the same boat,” Miller said. “They don’t want to be accused by the Street for overpaying for a second-tier asset.”

Disney agreed in July to pay $5.3 billion for Fox Family, including $3 billion in cash.

“Whoever buys it will be paying a strategic price,” said Drew Marcus, broadcasting analyst with Deutsche Bank. “It’s clearly a turnaround. Any buyer would have to convince themselves that they could improve Telemundo’s market share, but it will be difficult. Univision has a virtual monopoly.”

Telemundo reaches 85% of Latino households. But it has only a 20% market share, running a distant second to the Los Angeles-based Univision Communications Inc. Univision wrested away rerun and sequel rights to Telemundo’s most popular novella, “Betty La Fea,” a story about the travails of an ugly secretary.

With the acquisition of Telemundo, NBC would remain below the federal threshold that prevents companies from owning stations that reach more than 35% of the country.

However, the acquisition could threaten NBC’s option to buy the remainder of Paxson Communications Corp. unless the federal government relaxes the current regulations. NBC has an option to take control of Paxson next year. Paxson, the nation’s third-largest broadcaster, has 69 stations, with outlets in all but two of the 13 cities where NBC owns stations.

Even with a relaxation of the 35% regulation, an NBC purchase of both Paxson and Telemundo would put the broadcaster in violation of the so-called duopoly rules. Those recently enacted rules enable broadcasters to own two outlets in a major market. Paxson and Telemundo would give NBC at least three outlets in some key markets, including Los Angeles, New York and Chicago.

A deal with Telemundo alone also could force NBC, which owns one station in Los Angeles, to sell outlets because Telemundo owns two stations in L.A.

Broadcasters have been eager to capitalize on the improved operating efficiencies duopolies afford. Fox, for instance, which has the greatest number of duopolies, estimates that operating margins of its second stations can increase to 60% or more, from 40% or so, because of the ability to share programming, marketing and operating costs with the primary station.

However, analysts warn that NBC will not enjoy such dramatic operating improvements from duopolies with Telemundo. That is because of the limited ability to cross-program an English- and Spanish-language station or to use the same advertising sales force for both.