Disney and ABC to make magic

DAVID USBORNE

New York

The Disney Company yesterday dazzled Wall Street and the entertainment world by announcing a $19bn takeover of Capital Cities-ABC, fusing America's most fabled Hollywood studio with its number one television network.

The new company promises to be a television and film monolith that will have the opportunity not only to dominate the entertainment industry in the United States, but also around the world. Among those certain to feel the new challenge will be Rupert Murdoch.

Capital Cities-ABC, the parent company of ABC television, will become a wholly owned subsidiary of Disney. Pending approval by both companies' shareholders and regulators the merger will be the second biggest ever, after the 1989 $25bn buyout of RJR Nabisco by Kohlberg Kravis Roberts.

Until yesterday, there had been no whisper of the transaction on Wall Street, which had been preoccupied with rumours of a buyout of ailing CBS by Westinghouse. In early trading, the stock value of Capital Cities- ABC soared by more than 25 per cent. Under the proposed merger, stockholders in ABC will receive one Disney share and $65 in cash for each ABC share.

Disney's chairman, Michael Eisner, said at a press conference that the merger was driven by a desire to maximise earnings and improve world-wide penetration rather than any need for either company to restructure. "This is about increasing revenues, not cutting costs. I am totally optimistic that one and one add up to four here."

Almost in the mould of Disney's own library of fantasy cartoons, the agreement came about as if by magic. Though the two companies had been contemplating a marriage on and off for over three years, it took a chance meeting last week between Mr Eisner and ABC's chief executive, Thomas Murphy, on a street in an Idaho mountain resort to get the nuptials moving.

It happened after both men had attended an entertainment conference in Sun Valley. Spotting Mr Murphy alone on the street, Mr Eisner said he approached him and said simply: "Tom, do you think the time is right now?" The answer, apparently, was a simple "okay". That was eight days ago.

Both companies are already on peak form. Disney, which has theme park interests and shops for its products around the world, last year achieved record profits. ABC is currently number in the viewership competition against CBS and NBC.

ABC, with 225 affiliate stations around the US and eight stations that it owns itself, reaches 99.9 per cent of US viewing households. Importantly for Mr Eisner, ABC has also been aggressive in its expansion, taking 80 per cent of the ESPN sports cable channel and gathering media holdings world-wide, notably in Germany, France and Scandinavia.

Mr Eisner pointed to the potential for expanding the global presence of ESPN. He suggested China was a market suited to ESPN because its all- sports content meant it was unlikely to raise political hackles. Mr Eisner was careful, however, not to raise the spectre of Disney becoming the vehicle for American cultural hegemony. In the countries it would expand in, he said, "we would be sensitive to intellectual property issues. We would be minority players".

With little overlap between the two companies' operations, it is unlikely that the merger would lead to lay-offs among the combined workforce of 90,000. There was also optimism that the federal government would not stand in the deal's way for anti-competitive reasons. Disney would almost certainly have to dispose of its KCAL TV station in Los Angeles.

Warren Buffett, the investment guru whose company, Berkshire Hathaway, is a major holder of Capital Cities-ABC stock, said: "I think the deal makes more sense than any deal I have experienced.

"The right thing has been done for shareholders of both companies."