Lorimar-Telepictures' ambitious plan to acquire six television stations for $1.4 billion collapsed Wednesday after the Culver City-based company failed to persuade the sellers to lower their price a second time in less than a month.
The purchase was terminated by mutual agreement with Storer Communications, owner of the six TV stations that Lorimar had agreed last May to acquire.
Merv Adelson, Lorimar's chairman and chief executive, insisted that the company "did have the financing" to complete the deal but had re-evaluated its merit because of weakening demand by advertisers and the recent performance of broadcasting stations in general.
"In order for this to make economic sense, we really had to restructure the deal," said Adelson, reached by telephone at a Lorimar management meeting under way at the Rancho La Costa resort near San Diego.
Stock Market Reacts Favorably
The stock market reacted favorably to the news, with Lorimar-Telepictures shares closing up $1.75 at $23.25 on the American Stock Exchange.
Just three weeks ago, Lorimar announced that Storer had agreed to reduce its price by $30 million and that, "as previously agreed," the purchase price might be further reduced depending upon the operating results of the six stations. At the same time, Lorimar disclosed that it was abandoning the $405-million purchase of a seventh station from Wometco Broadcasting.
Both Storer and Wometco are controlled by Kohlberg Kravis Roberts & Co., a New York investment firm that led private buyouts of the two Miami-based firms in 1985 and 1984, respectively.
Storer spokesman Andy Holgate declined to comment other than to note that the offer last spring was initiated by Lorimar. At the time, Storer was not actively seeking buyers for the six stations, Holgate said.
From the outset, Lorimar's willingness to pay a total of $1.85 billion for the seven stations was criticized as foolhardy by some Wall Street investors.
Lorimar initially proposed financing most of the deal by selling high-risk, high-yield bonds and preferred stock to institutional buyers, but influential portfolio managers balked. In some published interviews, they labeled the deal overpriced and predicted that the stations would not generate enough cash to pay for the acquisition.
Deal 'Never Made Any Sense'
Despite subsequent changes in the proposed financing, and Lorimar's success last month in driving down the price, some Wall Street professionals still called it overpriced.
"The deal never made any sense," one portfolio adviser said Wednesday, asking not to be identified. He estimated that the cost of financing the acquisition would average about $200 million annually if the accrued interest payments on so-called junk bonds were included. That sum far exceeds the $85-million cash flow that analysts anticipate from the six Storer stations this year.
Four Wall Street sources said they had heard recurring rumors of disagreement among Lorimar-Telepictures executives about the wisdom of pursuing the deal. Executives from Telepictures, which merged with Lorimar earlier this year, were believed to be less enthusiastic, these sources said. But Adelson refuted those rumors, insisting that "we are one company here, and we act as one company."
Adelson declined to reveal the latest price concession sought by Lorimar.
Scrapping the deal will cost Lorimar about $7 million in expenses, the Lorimar chairman said in response to a question.
Lorimar and Storer had agreed to complete the deal no later than Dec. 29, presumably to allow Storer shareholders to pay lower taxes on their capital gains than the new federal tax code will permit in future years.
Storer's shareholders are bound to be disappointed by the collapse of the deal, one investment banker said. "They miss the boat completely on capital gains, plus the values on these (TV stations) are diminishing, not increasing."
The six stations included in the deal were KCST-TV in San Diego, WJBK-TV in Detroit, WJW-TV in Cleveland, WAGA-TV in Atlanta, WITI-TV in Milwaukee and WSBK-TV in Boston.
The Federal Communications Commission had approved the acquisition in late October.
The company said it plans to withdraw a proposed spinoff of almost all of its entertainment and advertising operations in a new company, with the parent controlling 85% of the stock. The $160-million stock offering was filed with the Securities and Exchange Commission last month.