ABC merger likely to generate spinoff sales. But both shareholders and the FCC must first agree to the deal

``Dynasty'' fans can rest easy. The friendly merger of the American Broadcasting Companies and Capital Cities Communications Inc., is not likely to change the programming scripts in the near future.

Before the marriage can be consummated, the two media conglomerates need the blessings of both the Federal Communications Commission and shareholders. ``Final approval could take a year,'', says Susan Watson, a media analyst at Morgan Stanley in New York.

This is the first time one of the major networks has changed hands. At $3.5 billion, it's the largest merger outside the oil industry. To get FCC approval and to pay for this mammoth purchase, several radio, television, and cable-TV operations will go on the auction block. But in the end, the FCC is likely to approve the deal, say analysts.

As for ABC shareholders, they will have until their annual meeting in June to consider the offer. And a sweet offer it is, say Wall Street analysts.

Only last Friday, ABC stock was trading at $74 a share. It has since surged toward $110. Capital Cities was up strongly Tuesday also. ABC has 29.1 million shares outstanding. Under the merger agreement, each ABC shareholder would get $118 in cash plus one-tenth of a warrant that would allow the purchase of Capital Cities common stock at a set price.

Each whole warrant would entitle the holder to purchase one share of Capital Cities common stock at $250 a share for a period of 2 1/2 years from the merger. For a 90-day period after the merger, Capital Cities says it will buy back the warrants for $30 each.

The two companies have valued the deal at $121 a share. But analysts say it could go higher. If Capital Cities earnings and stock price rise between now and when the merger is complete, the warrants could be worth $40 to $50. And if the merger is not complete by Jan. 6, 1986, the $118 offer will rise at a 6 percent annual rate and at even higher rates if not finished by June 30, 1986.

Capital Cities chairman Thomas S. Murphy said most of the money to buy ABC would come from bank loans. A portion would come from selling off an undisclosed number of radio and television stations.

Between ABC and Capital Cities, Ms. Watson at Morgan Stanley figures ``For Sale'' signs are likely to go up outside of television stations in New Haven, Conn.; Raleigh, N.C.; and Fresno, Calif. One radio station in Houston, and two stations in New York, Los Angeles, and Detroit are candidates on her list. Also possible sale items: The Oakland Press newspaper in Pontiac, Mich., and two small publications in New Jersey.

The rest of the money, $517 million, will come from Warren Buffett, chairman of Berkshire Hathaway, an Omaha-based insurer with wide stock holdings. Mr. Buffett, who has a taste for media stocks, will receive 3 million as yet unissued shares of Capital Cities treasury stock. This will give Mr. Buffett an 18 percent share in Capital Cities-ABC Inc. and a seat on the board.

Rumors of a hostile takeover have plagued ABC for about nine months. While ABC denies it, some analysts say ABC sought a friendly partner to protect itself. In any case, the resulting merger bears a greater relationship to ABC's placid ``Love Boat'' than the tempestuous ``Dynasty.'' Mr. Murphy, chairman of Capital Cities, called the merger a ``natural fit.'' Indeed, both companies have complementing sections of the broadcast, cable, and publishing pies.

Capital Cities, but a quarter of the size of ABC, has an empire of seven television stations, 12 radio stations, 54 cable systems, 10 daily newspapers, and 35 special-interest publications. More than half of its revenues come from the publishing segment. Less than one-third come from broadcasting.

At ABC, the glamorous but unpredictable broadcasting and programming segment accounts for almost 90 percent of revenues. The network has 200 affiliated television stations in its stable and a radio division almost 1,600 affiliates strong. The network owns five television stations and 12 radio stations.

In the last five years ABC ratings slipped as the network suffered from a lack of popular prime-time television shows. Last year, it was third among networks with its worst ratings score in 17 years.

In contrast to the more flamboyant but struggling ABC, Capital Cities takes a low-risk approach and ranks as one of the best-run media companies in the industry. ``Lean'' is the most common adjective used to describe management's style. Careful attention to costs combined with the freedom of a decentralized management are the key to its success.

A glance at the earnings of the two companies confirms this picture: Capital Cities earned $135.2 million on revenues of $939.7 million last year. Whereas ABC earned $195 million on revenue of $3.7 billion.

One of the catalysts for this merger -- and possibly future broadcast buyouts -- is the loosening of FCC regulations limiting station ownership. In the past, one company could own only seven AM radio stations, seven FM radio stations, and seven television stations. As of April 1, the 7-7-7 rule will become the 12-12-12 rule. However, one company cannot own 12 television stations with a combined audience of more than 25 percent of US homes.

Since the combined total audience share of the Capital Cities-ABC exceeds 25 percent, some of the television stations will have to be sold. FCC rules limiting the number of cable subscribers and cross ownership of stations within the same market will force further sales.

In terms of total revenues generated by parent companies, the new Capital Cities-ABC corporation will still be No. 3 among the major networks. And Leonard H. Goldenson, ABC's chairman who built the company from scratch over the last 30 years, will head the new corporation's executive committee.

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