DEAL GIVES TV A JOLT.

Byline: Dave McNary Daily News Staff Writer

Legendary entertainment executive Barry Diller and Universal Studios took the first step Monday toward launching a seventh television network through an audacious deal giving Diller control of Universal's TV assets.

Diller's Home Shopping Network will pay Universal owner Seagram Co. $1.2 billion cash plus a 45 percent stake of HSN worth $2.9 billion. For its $4.1 billion, HSN will receive USA Network and Sci-Fi Channel cable channels and a production unit with shows like ``Law and Order,'' ``Hercules: The Legendary Journeys'' and ``Xena: Warrior Princess.''

``Uniting Universal's content and USA cable network with Barry Diller's leadership and expertise in television creates a powerful force in the TV arena,'' said Jill Krutick, an analyst with Smith Barney. ``The strategic benefits are many.''

Krutick noted that the deal comes at a time when cable assets have been gaining in value as the sector boosts viewership, terming the industry backdrop as ``particularly positive.''

HSN's shares rose 3-1/4 to 41-7/8 and Seagram's stock gained 2 13/16 to 35-1/4.

Diller, the major force behind the 1986 birth and subsequent success of the Fox Network, said Monday that he plans to start a network of stations around its HSN channel in Miami next year with a goal of 5 percent viewership nationwide.

He said he also may use the USA Network to cross-promote the company's networks, to lure national advertisers and to show original Universal programming.

``This is essentially the Fox Network, part 2, using other people's assets,'' said Laura Martin, an analyst with Credit Suisse First Boston. ``It's good for Seagram and good for HSN because Barry Diller has a much bigger world view than other people in television.''

Seagram will have the right to take majority control of the combined company, to be called USA Networks, in four years.

Diller's HSN owns 12 UHF stations in major cities, including KHSC-TV in Ontario, reaching 28 million people. Diller plans for those stations, now carrying Home Shopping Network, to form a network built on local news, entertainment and sports from each of its markets.

HSN, of St. Petersburg, Fla., has been headed by Diller since late 1995 through a deal with cable mogul John Malone, who heads Tele-Communications Inc. HSN holds minority interests in stations in six major markets, and owns SF Broadcasting, which owns and operates four VHF Fox affiliates, making it the eighth-largest station owner in the country.

Analyst Arthur Rockwell said the deal is a jolt to TV's power structure.

``HSN has had to beg, borrow and steal to get on the air because it has no real clout with multiple-system cable operators,'' Rockwell said. ``Now, with USA and Sci-Fi, Diller has a lot more bargaining leverage. He should also be able to get USA's ratings up.''

Diller, who left Fox in 1992 after Rupert Murdoch refused to sell him a significant piece of parent News Corp., had been planning to develop local programming for the UHF stations in order to create a network but had been vague about launch plans. Earlier this year, he also bought a 50.1 percent stake in Ticketmaster Group Inc.

Diller, who has been in the entertainment industry for three decades, said Monday the deal with Seagram culminates his efforts of recent years. ``This is what I've always wanted to do to build a large media and electronic retailing company,'' he said. ``The value for this transaction lies in two areas - assets and partnership.''

For Seagram, the Diller deal may represent a chance at redemption for its decision to buy 80 percent of MCA Inc. and its Universal Pictures unit for $5.7 billion. It financed the deal by selling its stake in DuPont Co. in April 1995 for $8.7 billion.

Since then, DuPont shares have nearly doubled and Seagram's stock has been flat. Additionally, the TV businesses have lagged by comparison to Universal's movie and theme park businesses during CEO Edgar Bronfman Jr.'s stewardship.

``This deal provides a great solution to Seagram's most troubled entertainment asset,'' Martin said. ``Diller is a great operator.''

Martin said the most likely source for viewers of the new network would come not from NBC, CBS, ABC or Fox, but from the fifth and sixth networks, the United Paramount Network and the WB Network. ``Diller will take away ad dollars,'' she said.

Diller is one of the few executives to enjoy a strong reputation for spotting popular programming and for operating with financial restraint in an industry prone to wild overspending. His status was enhanced in recent years by dropping out of bidding wars in 1993 for Paramount Communications and for CBS a year later once the proposed deal prices became too high to be sensible.

``Diller has rarely made a misstep,'' Rockwell said. ``And he's proven that he can program a new network.''

Standard & Poor's debt-rating agency announced it would review for a possible upgrade HSN's B-plus corporate credit rating and the B-minus rating on $100 million of subordinated debt. S&P said combining Universal's television business with HSN's will better position the company for growth.

CAPTION(S):

2 Photos, 2 boxes

Photo: (1 -- color) no caption (Barry Diller)

(2 -- color) no caption (Universal globe)

Box: (1) Winners

(2) Losers