Lorimar-Telepictures confirmed Wednesday that, with a group of investors, it has agreed to pay $1.85 billion for six TV stations owned by Storer Communications plus a station owned by Wometco Broadcasting.
The deal will catapult the Los Angeles-based entertainment firm to the ranks of the nation's largest owners of TV stations, bringing its total to 12--the maximum permitted under Federal Communications Commission rules. Its stations will reach about 10.9% of the national TV audience. The purchase requires FCC approval.
Most entertainment industry executives interviewed Wednesday expressed private views that Lorimar is paying a princely sum, but they spoke admiringly of the company's innovative proposal for financing the deal, putting up little more than $300 million of the total.
According to Michael Garin, one of four executives who share the presidency of Lorimar-Telepictures, a new broadcasting company will be created, with shares traded on a public exchange. The deal will be structured to allow Lorimar to buy 75% of a class of preferred securities for $300 million, and it will also receive a fee for managing the stations. With this kind of arrangement, Lorimar does not expect the broadcasting acquisition to have an adverse effect on its earnings.
Under Chairman Merv Adelson, Lorimar--best known for producing TV dramas such as "Dallas"--has diversified into motion picture production, advertising and home video.
Lorimar-Telepictures was created by the merger earlier this year of two successful TV programming companies. Before the merger, Lorimar made an unsuccessful, billion-dollar bid to buy Multimedia, a Greenville, S.C.-based broadcasting and newspaper firm. More recently, the merged company considered--but never bid on--stations owned by Outlet Co., Gencorp and the Evening News Assn. of Detroit.
Most of the financing--about $1.5 billion--will be raised in debt offerings by the investment banking firm of Drexel Burnham Lambert, Garin said. An additional $100 million in preferred shares will be sold to institutional investors, he said.
Another $25 million will be raised through the sale of common stock. Lorimar expects to acquire 75% of those equities, passing on the shares in the form of a dividend to its own shareholders. The remainder will go to those institutional investors who purchased preferred securities and debt, Garin said.
Five of the stations being acquired are CBS affiliates: WJBK-TV in Detroit, WJW-TV in Cleveland, WAGA-TV in Atlanta, WITI-TV in Milwaukee and WTVJ-TV in Miami. Some entertainment industry officials speculated that ownership of so many CBS affiliates may give Lorimar-Telepictures leverage with that network in selling its programs. The other stations being acquired are KCST-TV, an NBC affiliate in San Diego, and WSBK-TV, an independent station in Boston.
The Miami station is being sold by Wometco.
The deal was well received on Wall Street, where the price of Lorimar-Telepictures shares closed at $30.75, up $2.75, on a volume of 1.54 million shares. The stock was the most active issue Wednesday on the American Stock Exchange.
But several executives expressed puzzlement over the new company's ability to pay for the deal out of its cash flow.
Gordon Crawford, an analyst for Capital Research, a large institutional money-management firm based in Los Angeles, said: "It's a terrible deal, because it's way too much money." By Crawford's calculation, the cost of financing the acquisition averages about $235 million to $260 million annually if he includes the accrued interest on the proposed notes. Yet the stations are expected to generate just $100 million in cash flow this year, according to the analyst and other executives who have reviewed Storer's last available financial data.
"I won't touch their $1.5 billion in 'junk' (bond) financing for all the tea in China," Crawford said.
Many industry executives agreed that the stations' sellers have turned a swift profit. Storer Communications was acquired five months ago for $2.4 billion by a company backed by the investment firm Kohlberg Kravis Roberts & Co. At the time, Storer's seven TV stations were valued at about $1.1 billion.
"I'm surprised they're getting this much money for them," said Paul Tierney, a principal in Coniston Partners, the New Jersey investment group that proposed liquidating Storer last year to realize undervalued assets.
The Coniston proposal touched off a series of events that resulted in the Kohlberg Kravis takeover.
Nevertheless, Tierney said, the deal appears good for Lorimar because "these investors really are the ones who are paying an inflated value for the company."
Garin defended the price, insisting that Kohlberg Kravis "could have sold them (individually) for a lot more money than they sold them as a group."
Garin said that the negotiations were undertaken "within the last 10 days" and that Kohlberg Kravis negotiated with no other company about the purchase of the stations as a group.