Chris-Craft, Diller in Talks to Team on UPN

Barry Diller’s USA Networks Inc. and Chris-Craft Industries Inc. are in discussions to become partners in the UPN television network, according to sources close to the companies.

UPN could be Diller’s best chance for reentering the network business after losing out on both CBS and NBC, which he tried to buy almost two years ago. Diller is credited with building the Fox Television Network for Rupert Murdoch.

But Chris-Craft’s controlling shareholder, Herbert Siegel, also is being urged by his advisors to sell out entirely to Viacom Inc., his 50-50 partner in UPN.

A ruling Thursday by a New York judge clears the way for a restructuring of the ownership of UPN, which was launched in 1995 as a joint venture of Viacom and Chris-Craft. State Supreme Court Justice Herman Cahn in Manhattan dismissed a breach-of-contract lawsuit brought by Chris-Craft against Viacom.

The court refused Chris-Craft’s request to block Viacom’s merger with CBS and validated a provision of the UPN partnership pact under which Chris-Craft has until Monday to either take control of the money-losing network for $5 million or sell it for the same price to Viacom.

Analysts said Viacom’s court victory vastly reduces Chris-Craft’s options and its bargaining position. The company, which sources say is reluctant to shoulder UPN’s heavy ongoing losses, is likely to either sell its stake in UPN, along with its 10 TV stations, to Viacom or to buy out Viacom and hand control of the network to Diller.

“We are dealing with a lot of movable pieces here,” one source close to the situation said.

Chris-Craft’s subsidiary BHC Communications Inc. and Viacom’s Paramount Pictures studio have lost more than $800 million in UPN, which faces losses of $200 million a year for the next several years.

After a rocky start, UPN is only now gaining traction, thanks largely to the addition last fall of programming from World Wrestling Federation, which have lifted ratings this season 35%, tying it for fifth place with the WB network.

Sources say Siegel’s advisors are urging him to cash in on the high prices of broadcast properties by selling to Viacom.

But so far, Siegel has been unwilling to give up control, even though he appears to lack the appetite for growth needed to survive the rapid media consolidation in which media players own both the content and expansive networks for its distribution.

Following Viacom’s agreement in September to buy CBS, Viacom began negotiated to buy BHC, including its 10 UPN affiliates, but sources say talks broke down because Siegel insisted on a price of $100 a share, valuing the assets at more than $4 billion. Viacom-CBS was unwilling to pay more than $85 a share.

Frustrated, Viacom triggered the buy-sell provision in the UPN partnership agreement in February, giving Chris-Craft 45 days to respond to an offer that set the price for UPN at $5 million.

Chris-Craft retaliated with the lawsuit, contending that Viacom’s merger plan with CBS violated a noncompete agreement in the UPN pact. Chris-Craft requested that the court block the merger.

Because the judge indicated several weeks ago that he would not block the Viacom-CBS merger, sources say Siegel has been in settlement talks with his partners while also pursuing a parallel track with Diller.

Diller has struggled with his own plan to launch a network over his large station group. Owning a network could help him compete against Viacom-CBS for renewal rights to the coveted World Wrestling Federation franchise for his USA cable channel as well as for other programming.

Wrestling, USA’s highest-rated programming, expires in September after 17 years, and CBS-Viacom is making a play for both broadcasting and cable rights to WWF’s wrestling and new football league.

Whichever party ends up with UPN is likely to win the bidding for WWF programming. CBS’ plan calls for putting WWF programs and XFL football games on cable channel TNN as well as on UPN, so as not to upset its relationship with the NFL. Diller can’t match that offer because he now lacks a broadcast outlet.

Sources say Diller, who is not eager to partner with the difficult Siegel family, would probably demand control over UPN. Chris-Craft is hardly in a position to refuse if Siegel wants a continued source of programming for his stations. Diller, regarded as a programming genius, controls the Universal television production studio.

Chris-Craft formed UPN with Paramount to secure programming for its independent stations, which were finding it increasingly costly to compete against the nation’s largest station groups, owned by the networks.

Should Chris-Craft end up with UPN, Viacom is likely to withdraw its stations from the network when the affiliation agreement expire in January 2001. Diller’s stations would help fill in those gaps, although not perfectly.