News Corp. to Buy Chris-Craft Parent for $5.5 Billion, Outbidding Viacom

News Corp. has agreed to buy BHC Communications and its 10 Chris-Craft television stations for $5.5 billion in stock and cash, sources said Friday. The deal would move the Rupert Murdoch-controlled company into a tie with Viacom Inc. as the nation’s largest station operator, with outlets that reach 40% of American households.

The deal, expected to be announced Monday, also would make News Corp. the largest owner of affiliates of the UPN network. However, sources said, UPN is likely to be shut down quickly as a result of the deal, and News Corp. will use the stations to air news, sports and entertainment programming that it already generates in-house.

News Corp. would also have two TV stations in four cities--New York, Los Angeles, Phoenix and Salt Lake City.

BHC is a publicly traded company whose primary holding is the 10 television stations of Chris-Craft Industries.

In making the deal, News Corp. beat Viacom in an eleventh-hour bidding contest. Chris-Craft was sought by both News Corp. and Viacom because it is the only group outside the major networks with stations in both New York and Los Angeles, the nation’s largest markets. The “duopolies” News Corp. would get in those markets could lead to operating efficiencies over rivals such as CBS, NBC and ABC.

For instance, in Los Angeles, News Corp. could spread costs for news, sports and entertainment programming across both Fox’s KTTV Channel 11 and Chris-Craft’s KCOP Channel 13. The second station could also draw upon News Corp.’s other assets, which besides the Fox television network include a 24-hour news channel, the Fox Sports regional cable channels and the 20th Century Fox studio, which produces movies such as “Titanic” as well as TV shows such as “Ally McBeal,” “The Simpsons” and “The X-Files.”

The deal could enable News Corp. to consolidate its advertising clout locally--a trend among major media companies. Advertisers are willing to pay higher rates locally than on a national basis. In April, Fox consolidated advertising sales of its regional sports networks under its television station group, allowing the company to customize deals for advertisers. This is not unlike what CBS has been trying to do with its local dominance in radio, billboard and television.

Officials at News Corp. and Chris-Craft did not return calls late Friday. But Chris-Craft released a statement after the stock market closed, confirming merger talks with a major media company other than Viacom. An hour earlier, Viacom said it had ended talks with Chris-Craft, whose stock dropped on the news.

The battle for ownership of Chris-Craft was sparked by changes in federal rules last year that for the first time allowed broadcasters to own two TV stations in certain markets. These new rules spurred the $50-billion acquisition of CBS by Viacom, which became the nation’s largest station group as a result. Viacom now owns 35 stations affiliated with the UPN and CBS networks and would have had six duopolies had it won the bidding for Chris-Craft.

The overlap made Chris-Craft a better fit with Viacom, but Viacom walked away Friday after months of negotiations because it was unwilling to pay as steep a price as News Corp. Sources said News Corp.’s offer, which values Chris-Craft at $85 a share, topped Viacom’s bid of $83. The bid for Chris-Craft shares accounts for roughly $3 billion of the deal, sources said. Terms of the rest of the deal were unclear.

News Corp.’s victory is a surprise. The company withdrew from the bidding last year because of the price and Chairman Murdoch’s preoccupation with launching Sky Global, his worldwide satellite operation. At that time, however, Herbert Siegel, who controls BHC, was holding out for $100 a share.

News Corp., however, reemerged at the last minute, bolstered by a stock that has nearly doubled in the last year. But the deal could reignite concerns on Wall Street that Murdoch overpays for strategic assets.

Sources say the bad blood between Viacom Chairman Sumner Redstone and Siegel also has factored in News Corp.’s victory. Siegel was not eager to sell to Viacom because of his rocky 50-50 partnership with Viacom in the UPN network. Such tensions erupted earlier this year when BHC filed a lawsuit against Viacom and CBS to block their merger, saying the merger violated the UPN partnership.

Chris-Craft lost the suit, and Viacom ended up buying the remaining 50% of UPN for a measly $5 million.

Sources say Chris-Craft had little choice but to sell after losing $500 million on the network start-up and facing the prospect that UPN might be shut down. Viacom Chief Operating Officer Mel Karmazin has been threatening to pull the plug unless UPN turns a profit. Sources say Karmazin has been threatening not to renew Chris-Craft’s affiliation deal with UPN, which expires in January.

Now, they say, Karmazin is likely to close UPN before the fall prime-time season begins rather than lose $150 million over the next year on the network. He could not air CBS programming on the former UPN-affiliated stations without violating the contract he has with CBS affiliates.

Television executives also question how Wall Street will react to the rich price News Corp. would pay. Broadcast properties have fallen out of favor with investors, with TV station groups trading at near-lows because of the high costs of their conversion from analog to state-of-the-art digital technologies and the uncertainties of the payoff for doing so.

News Corp. would pay a 37% premium over Chris-Craft’s closing price Friday. The shares plunged $8 after Viacom’s announcement that merger talks were dead, closing at $62 on the New York Stock Exchange. But the takeover speculation has propped up the stock for the last year.

News Corp. shares fell 88 cents to $49.75, and Viacom Class A gained $1.31 to $71.94, both on the NYSE.

With the purchase, News Corp. would run afoul of federal rules that forbid broadcasters from owning stations that reach more than 35% of the nation. Technically, the Chris-Craft group would give News Corp. a 54% reach. But because the four overlapping Chris-Craft stations wouldn’t count toward News Corp.’s total under the duopoly rules, the count would be only 40%.

That means it could be forced to sell two or three of the 10 stations.