Fin-syn likely to spawn double features; analysts: joint ventures will be favored over mergers.

Fin-syn likely to spawn double features

Television networks and independent film studios may form joint ventures but are not likely to merge if the Federal Communications Commission adopts anticipated changes in the "fin-syn" rules April 9, stock analysts predict.

Stockholders of CBS Inc. and Capital Cities/ABC Inc., and in major studios like Walt Disney Co. and Paramount Communications Inc., have been reacting in recent months to the possibility of mergers if the FCC was to relax its financial interest and syndication rules.

The fin-syn rules, in place since 1970, basically prohibit television networks from having a financial interest in programs they broadcast or from syndicating programs. This week, after nearly a month's postponement, the FCC is scheduled to decide whether the rules should be changed. The FCC decision was originally scheduled for March 14.

The proposal which entertainment industry experts say is most likely to be adopted by the commission is the revised, so-called "Barrett Plan." The plan was initiated by Commissioner Andrew Barrett, who has been regarded as the swing vote in the fin-syn decision.

Among other things, the plan defines a network as an entity providing 14 or more hours per week of prime-time programming reaching at least 75 percent of U.S. households. It also stipulates that networks can produce up to 40 percent of their own prime-time schedule, and there are no restrictions on the financial interest or syndication of programs not shown during prime time.

Current fin-syn rules do not specifically prohibit networks and studios from merging. However, by restricting networks' ownership and syndication of television programs, the rules effectively prevent a network-studio merger unless the studio doesn't produce or syndicate television programs, according to Christopher Dixon, an analyst with Kidder, Peabody stock brokerage firm in New York.

However, both the networks and studios are frustrated with today's fragmented television marketplace, and "are driven by the merits of business and the returns that can be generated," Dixon said. For instance, Burbank-based Disney and New York-based Paramount find it uneconomical to produce one-hour dramas, Dixon said.

Producing these shows would be uneconomical because the original runs of the shows don't make enough money to cover the cost of the licensing. Furthermore, the networks are short of cash to buy these types of programs for syndication, said Joel Koenig, partner in charge of the Century City office of Deloitte & Touche. "They can't do it. The numbers don't work," Dixon said.

In addition, the networks find they need to develop more series programs to "maintain a dwindling market share," Dixon added.

Initial runs of programs aren't profitable but a program with 52 original shows can be more easily syndicated than a program with fewer episodes, Koenig said.

Once the "regulatory smoke clears" from the fin-syn issue, the Hollywood players will adjust to the new rules and there may be some mergers, Dixon said.

If a network and a studio merged, the conglomerate would eliminate a lot of overhead and staff, thus cutting costs, and the studios would also have a convenient market for their programs, Koenig added.

However, one analyst said he thinks the current proposal would provide enough incentive for networks and studios to merge.

Mergers would be prohibited because the proposal forbids networks from distributing first-run syndication programs and places other limits on their financial interests in programming, said Paul Marsh, a media stock analyst with Los Angeles-based stock brokerage Kemper Securities. Therefore, a studio and network merger would be subject to the same restrictions, he said.

"You would need a full repeal (of fin-syn), I think," for the mergers to proceed, Marsh said.

Under the proposed Barrett plan, a network would be able to produce 40 percent of its own programming for showing on its own network only. Therefore, if a studio and a network merged, all programming produced by the studio on other networks would have to be shifted for showing on the merged network, said Alan Gould, an analyst with Dean Witter Reynolds, a brokerage firm in New York.

Douglas Lowell, an analyst with investment brokerage H.J. Meyers & Co. in Beverly Hills, said he thinks the likelihood of mergers has more to do with the structure of the rules. If the percentage of programming that networks own increases over time, the likelihood for mergers will also increase over time, he said.

Rumors have arisen in entertainment circles concerning a possible merger between CBS and Walt Disney Studios, and that Paramount could either acquire or be acquired by a network, most likely ABC.

Gould said Paramount would be more likely to acquire another company for several reasons. For openers, Paramount Communications Chairman Martin Davis "is a buyer, not a seller."

Also, the fact that Davis recently created the new position of president at the company is an indication that he wants Stanley Jaffe, who filled the spot, to take more hands-on control of the company. This leaves Davis more time to focus on how he wants to spend the large sum of capital that Paramount has, Gould said.

At the end of fiscal 1989, Paramount Communications sold a financial services subsidiary to Ford Motor Co. for $3.35 billion, injecting the company with capital.

Meanwhile, the Barrett plan could lead to "strategic alliances between networks and independent producers," Lowell said. For instance, Dixon said, they might share in post-production.

The industry will see both manufacturing and distributing outlets looking for more innovative ways to adapt to the "highly fragmented" television marketplace of the 1990s, Dixon added.

Frustrated with the "fin-syn" proposals made by the FCC, the networks and the studios met March 26 to decide on a compromise of their own, but to no avail. After more than four hours, the talks fell apart with little prospect for revival.

There was no reaction on Wall Street to the talks breaking down, Lowell said.