Gemstar Buys Rival TV Guide

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Gemstar International Group Ltd. trumped rival TV GuideInc. last week, buying the company that once attempted a hostile takeover of Gemstar.

Gemstar -- locked in a two-year-old patent-infringementbattle with TV Guide and predecessor United Video Satellite Group Inc. -- said last weekthat it agreed to buy TV Guide for $9.2 billion in stock and assumed debt.

The deal, which should be completed in about nine months,creates a dominant player in the emerging interactive-program-guide business with combinedrevenue of $1.5 billion and cash flow of about $400 million.

Gemstar chairman Henry Yuen said the companies' close,albeit unfriendly, contact over the past couple of years led to the marriage.

"I think we learned about each othertremendously," Yuen said in a conference call with reporters.

TV Guide president Peter Boylan said that in the past, hiscompany did not feel that it needed a relationship with Gemstar -- primarily after its $2billion offer to buy Gemstar last year was rebuffed. Yuen changed his mind, he added

"Henry did a good job," Boylan said. "Themore time we spent together, the more we recognized that the opportunity was there to dothings that couldn't be done independently. Henry is in the consumer-electronicsbusiness, where we have no presence. We built an advertising-sales organization that does$250 million a year in advertising sales."

The merger proposal came a little more than one year afterUVSG agreed to buy TV Guide in a stock transaction valued at about $2.5 billion.

TV Guide shareholders will get 0.6573 shares of Gemstar foreach TV Guide share. TV Guide's primary shareholders -- News Corp. and Liberty MediaGroup -- each own 44 percent equity, and they will collectively own 45 percent of the newcompany.

Yuen remains chairman and CEO of what will be called TVGuide International. Boylan will become co-president and co-chief operating officer, andTV Guide chairman and CEO Joachim Kiener will be the other co-president and co-COO.

Boylan will run the cable IPG unit, while Kiener will runTV Guide Entertainment.

Gemstar's stock has risen dramatically in the past fewmonths over hype about IPG potential as cable rolls out digital boxes. Yet it had minimalIPG market share compared with TV Guide Interactive's 2.4 million cable homes.

Gemstar's success has been in consumer electronics --licensing "VCR-Plus" technology for televisions, VCRs and set-tops. TV Guidefocused on MSO deals with the likes of Cablevision Systems Corp., Comcast Corp. andAT&T Broadband & Internet Services.

Stephens Inc. analyst John Corcoran said that with thedeal, Gemstar has "effectively cracked open the cable nut."

While TV Guide was signing up MSOs, Gemstar was heading tocourt. It currently has 11 federal patent-infringement lawsuits outstanding and twocontract-arbitration suits against companies such as Scientific-Atlanta Inc. and PioneerElectronics Corp.

But Gemstar did reach an arbitration settlement withGeneral Instrument Corp. regarding a breach of contract suit filed by Gemstar in 1992.According to the agreement, GI will pay Gemstar between $25 million and $36 million incompensatory damages and another $12.5 million to $17.5 million in punitive damages. Apatent-infringement lawsuit against GI is still pending.

Those lawsuits scared some operators away from pickingeither IPG. Corcoran said he believes the TV Guide merger will eliminate much of thatfear.

"The TV Guide senior-management team has a very goodrelationship with cable operators and equipment vendors," Corcoran said. "Theyare going to play the role of peacemaker and broker a settlement between Gemstar and GIthat could turn into a licensing agreement."

Some cable executives welcomed the Gemstar-TV Guide mergerbut said it's not clear what's in store for them.

"The real issue is that we haven't heard anythingyet on what the new deal will be for us. We are interested in what the terms will be forcarriage and what the product is from this new merged company," MediaOne Group Inc.senior vice president of video Judi Allen said.

MediaOne had been in "active negotiations" withTV Guide, and it had "some discussions" with Gemstar before the merger wasannounced, but it held off on signing with either company, partly because of their legalbattle, she added.

"Getting legal protection from all of theramifications from the litigation was a big issue for us," Allen said, explainingthat before the merger announcement, MediaOne wanted to be indemnified if it signed witheither company.

Cable One Inc. CEO Tom Might said he was in finalnegotiations with both Gemstar and TV Guide, but he didn't think the merger agreementwould affect his IPG plans.

"In fact, TV Guide was here on the day of theannouncement. It didn't influence my thinking at all," he added.

Steve Donohue contributed to this report.

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