Before the Federal Communications Commission Washington, D.C. 20554 In re Application of ) ) HLT CORPORATION AND ) HILTON HOTELS CORPORATION ) File No. BTCCT-970304IA ) For Consent to Interim Transfer of ) Control of ITT Broadcasting Corporation) ) and ) ) HLT CORPORATION AND ) HILTON HOTELS CORPORATION ) File No. BTCCT-970304IB ) For Consent to Transfer of Control ) of ITT Broadcasting Corporation ) MEMORANDUM OPINION AND ORDER Adopted: November 5, 1997 Released: November 6, 1997 By the Chief, Mass Media Bureau: INTRODUCTION 1. HLT Corporation (HLT), a wholly-owned subsidiary of Hilton Hotels Corporation (Hilton), seeks to acquire control, by an unsolicited tender offer or a proxy contest, of ITT Corporation (ITT), which, through its wholly-owned subsidiary ITT Broadcasting Corporation (ITT Broadcasting), holds a 50% general partnership interest in ITT-Dow Jones Television, the licensee of WPXN-TV, Channel 31, New York, New York. To facilitate the tender offer, HLT and Hilton filed on March 4, 1997, a supplemented short-form application, FCC Form 316, with a request that the Commission grant a special temporary authorization (STA) permitting a transfer of control of ITT's interest in the licensee of WPXN- TV from ITT's current shareholders to the trustee of a voting trust. Should HLT succeed in its tender offer, this trustee would hold and vote, subject to certain restrictions, the shares of ITT Broadcasting formerly held by ITT and would exercise control of ITT Broadcasting's interest in the licensee of WPXN- TV, during the interim period when HLT's qualifications to be a broadcast licensee are under consideration by the Commission. Simultaneously with their STA request, HLT and Hilton filed a long- form application, FCC Form 315, seeking Commission consent to the transfer of ITT Broadcasting from the trustee to HLT. 2. ITT and Dow Jones & Company, Inc. both filed objections to Hilton's short-form application pertaining to the tender offer. Subsequently, ITT filed a petition to deny Hilton's long-form application. HLT and Hilton have replied to the objections and petition to deny. In letters dated May 9, 1997 and July 30, 1997, the Chief, Video Services Division requested HLT and Hilton to submit additional information on several specified matters to facilitate the Commission's evaluation of the long-form application. HLT and Hilton submitted this additional information in the form of amendments to their long-form application, and ITT replied to those amendments on June 5, 1997 and August 26, 1997, respectively. More recently, on November 3rd, Hilton and HLT informed the Commission that they had again extended the time of their tender offer and increased the offering price. A financial amendment responsive to this revised tender offer was filed on November 4, 1997. 3. Hilton's initial short-form application for an STA to transfer control of ITT Broadcasting to a trustee, and its long-form application to subsequently transfer control from the trustee to HLT, followed established Commission procedures for hostile corporate takeovers where broadcast licenses are held by the target company. These procedures recognize that where unsolicited tender offers are made, the hostile nature of the offer and the provisions of applicable securities laws require unusual expedition in our processing of the transfer applications. It was to accommodate these needs that the Commission adopted the two step "short-form/long-form" transfer procedure. In this case, however, due to repeated extensions by Hilton of the expiration of its tender offer for ITT, we are able to act on the long-form application for transfer of control of ITT Broadcasting to HLT at this time, and there is no need to consider Hilton's short-form application and STA request to transfer ITT Broadcasting to a trustee. Consequently, the long-form application is hereby constructively amended to provide for the transfer of ITT Broadcasting from ITT directly to HLT, and the short-form application and STA request, and all related pleadings, are dismissed. Accordingly, only HLT and Hilton's long-form application, as amended, which seeks consent to the transfer of ITT Broadcasting to HLT, and related pleadings, are under consideration here. See MMM Holdings, Inc., 4 FCC Rcd 6838 (Com. Car. Bur. and Mass Med. Bur. 1989), aff'd 4 FCC Rcd 8243 (1989). DISCUSSION 4. In its various pleadings, ITT has challenged the grant of Hilton's long-form application on three primary grounds. Specifically, ITT has opposed the grant of Hilton's request for a temporary waiver of the cable-broadcast cross-ownership rule, contending that Hilton has failed to demonstrate that such a waiver would serve the public interest and that the recusal statements submitted by the Hilton officer/director involved in the cross-ownership situation are inadequate. ITT also contends that Hilton has not demonstrated its financial qualifications, and has not, through its survey of stock ownership, demonstrated compliance with the statutory restrictions on alien ownership. Cable Television/Broadcast Cross-Ownership Rule 5. As described above, the licensee of WPXN-TV is ITT-Dow Jones Television (ITT/Dow Jones), a general partnership whose two general partners are wholly-owned subsidiaries of ITT and Dow Jones & Company, Inc. Hilton's original Exhibit D to its long-form application for transfer of control of ITT Broadcasting noted that its President and Chief Executive Officer, Stephen F. Bollenbach, had been nominated to the Board of Directors of Time Warner Inc. (TWI). Hilton acknowledged that Bollenbach's service as a TWI director would conflict with the cable television/broadcast cross-ownership rule (cross-ownership rule) because ITT has an interest in WPXN-TV and TWI controls Time Warner Cable of New York City (TWNYC), which owns and operates a cable system within the Grade B contour of WPXN-TV. On May 15, 1997, Bollenbach was elected to the TWI board, and Hilton amended its application to request a temporary waiver of the cross-ownership rule. Hilton contends that the waiver will be of "extremely limited duration" because ITT/Dow Jones has agreed to sell WPXN-TV to Paxson Communications Corporation (Paxson) and anticipates that the sale will be consummated by the end of 1997. Hilton seeks a temporary waiver of 12 months or until the sale is consummated, whichever event first occurs. 6. Arguments. Hilton argues that the Commission should grant it a temporary waiver because it is consistent with the temporary waivers granted in other cases in order to allow parties to a merger adequate time to divest conflicting interests without delaying the merger. Hilton argues that temporary waivers are particularly appropriate when they facilitate larger transactions. Hilton asserts that here the cross-ownership conflict arises with respect to ITT's interest in WPXN-TV, which is one percent of ITT's total assets and, as such, an incidental part of a much larger transaction. 7. Hilton also states that following consummation of Hilton's tender offer for ITT, Bollenbach will recuse himself from all decisions implicating WPXN-TV. In support of its assertion, Hilton submits a certification from Bollenbach which recites his understanding of ITT's intention to sell WPXN-TV and his representation that from the time of consummation of the tender offer until WPXN-TV is divested, either by sale to Paxson or otherwise, he will not be involved in the operations, management or disposition of WPXN-TV and will recuse himself from any matters that involve WPXN-TV that come before the Hilton Board. Bollenbach also asserts that, although he is CEO of Hilton, he can completely recuse himself from decisions relating to WPXN-TV for three reasons: there is a definitive agreement to sell WPXN; ITT's interest in WPXN-TV is an extremely small component of its overall holdings; and WPXN-TV will not be part of Hilton's core business. 8. Hilton also provides a Declaration from Matthew J. Hart, Hilton's Executive Vice President and Chief Financial Officer, that he will be responsible for oversight of WPXN-TV from the time the tender offer is consummated until consummation of the sale of WPXN-TV to Paxson. Hilton offers that if the Commission requires, Bollenbach will also recuse himself from matters that come before the TWI board that specifically pertain to any of the cable systems located within WPXN-TV's Grade B contour until the sale of WPXN-TV is consummated. 9. Hilton further argues that the relevant market, New York City, is the largest and most diverse in the country, served by 170 broadcast stations, 118 of which are separately owned. In addition, Hilton states that there are 29 daily newspapers and six Multipoint or Multichannel Multipoint Distribution Service operators licensed to serve the New York City DMA. Based on the asserted diversity of the New York City market, Hilton argues that the impact on the affected cable households, which are 16.5% of the 6,711,450 television households in the New York DMA, would be minimal. Hilton further contends that even this impact is eliminated by Bollenbach's recusal from all WPXN-TV matters. Hilton asserts that there would be no harm to the public interest by granting a temporary waiver. 10. ITT opposes Hilton's request for a temporary waiver of the broadcast/cable television cross- ownership rule. As an initial matter, ITT contends that Hilton's request for a waiver of the cross- ownership rule should have been placed on public notice to afford notice to interested parties such as franchising authorities and local television stations. ITT argues that Hilton should have followed the procedures required under Section 76.7 of the Commission's rules because it paid the $960 fee generally required for a petition for special relief and used code letters when filing its supplemental request. ITT further contends that Hilton should have followed the requirements of Section 76.7(b) to serve other television stations in the New York City market, TWNYC, and the City of New York. ITT argues that due to lack of service and notice, the Commission cannot grant Hilton's waiver request. 11. In addition to its procedural objections, ITT also asserts that the Commission should not grant Hilton's waiver request because all of TWNYC's subscribers are located within WPXN-TV's Grade A contour. ITT argues that TWNYC is important and influential nationally, as well as in the New York market, that a channel on this system is highly valuable, and that the TWI board influences or dictates what programming TWNYC will carry. ITT alleges Bollenbach would be in a position to influence TWI decisions affecting WPXN-TV. 12. ITT further argues that this case differs from those relied upon by Hilton as support for granting a temporary waiver to facilitate a large transaction. ITT asserts that in prior Commission cases, the conflicting cross-ownership issues arose due to existing ownership. ITT argues that here the cross- ownership conflict arose because Bollenbach agreed to serve on the TWI board after Hilton announced its tender offer for ITT. ITT suggests that Bollenbach should agree to resign from the TWI board or recuse himself from involvement with the TWNYC cable system when Hilton acquires an attributable interest in WPXN-TV. 13. ITT also contends that Bollenbach cannot recuse himself from matters involving WPXN-TV because he is Hilton's CEO. ITT argues that Bollenbach's "corporate responsibilities extend to all aspects of Hilton's operations . . .[and] therefore is not eligible for recusal pursuant to Section 76.501 Note 2(h)." ITT also asserts that Bollenbach's involvement in the tender offer for ITT stock could have a direct effect on WPXN-TV, and he should, therefore, recuse himself from involvement in the tender offer. ITT further states that Bollenbach's declaration of his willingness to recuse himself from matters that come before the TWI board concerning cable systems within WPXN-TV's grade B contour also is inadequate. ITT argues that Bollenbach could still participate in decisions on TWI's cable systems nationwide, which would affect programming and operations of individual cable systems, including TWNYC. 14. ITT maintains that Bollenbach's recusal declaration is inadequate as it will allow Bollenbach to receive information about WPXN-TV and communicate with Hilton or TWI representatives about that information. ITT argues that Bollenbach's receipt of information about WPXN-TV could influence TWNYC's cable operation. ITT states that Bollenbach's Declaration does not ensure that information he receives as a TWI board member will be redacted to exclude information about the TWNYC cable system. ITT notes that in cases in which individuals seek relief from attribution through recusal, the Commission has required that the individual be recused "at all times and from all matters that involve and /or implicate the subsidiary holding the licensee," including issues that are only indirectly related. ITT argues that Bollenbach's recusal does not meet this standard, and, therefore fails to justify granting Hilton's waiver request. 15. ITT asserts that the TWNYC cable system has a 69% cable penetration rate in the New York City DMA and is, therefore, "a bottleneck facility" that dominates the distribution of video programming in the New York market. ITT contends that TWNYC's decisions pertaining to programming that competes with WPXN-TV's programming could affect WPXN-TV's efforts to attract viewers and advertisers. For these reasons, ITT asserts, Bollenbach's Certification does not meet the requirements of Section 76.501 Note 2(h). 16. Discussion. Section 76.501 of the Commission's Rules prohibits the common ownership and/or control of a television station and a co-located cable television system. This regulatory restriction was first implemented in 1970 and later codified into a statutory requirement by the Cable Communications Policy Act of 1984. The statutory ban was recently repealed by the Telecommunications Act of 1996. The Commission's rule, however, is still in effect. Prior to codification of Section 76.501 by Congress in 1984, the Commission, on a number of occasions, granted special relief regarding the rule on both a permanent and temporary basis. During the time the statutory ban was in effect, the Commission granted temporary relief in contemplated divestiture situations, based on the belief that reasonable accommodations may be made to avoid the risk of "fire sales." Since the repeal, the Commission retains the authority to grant both temporary and permanent relief regarding Section 76.501. 17. ITT first argues that the Commission cannot rule on Hilton's request for a temporary waiver of the broadcast/cable television cross-ownership rule because the request has not been put on public notice and Hilton has not served other potentially interested parties. We disagree. In this case, Hilton filed its long-form application for transfer of control of ITT Broadcasting with the Mass Media Bureau. Hilton's long-form application revealed a potential future conflict with the Commission's cross-ownership rule if Hilton's CEO, Bollenbach, was elected to the TWI board and if the Hilton tender offer was accepted before ITT/Dow Jones consummated their definitive agreement to sell WPXN-TV to Paxson. After Bollenbach's election to the TWI Board, the Commission asked Hilton to address the potential cross-ownership problem, and Hilton supplemented its application with a request for temporary waiver. In compliance with Section 73.3584(a) of the Commission's rules, Hilton's long-form application was placed on public notice. Hilton served its waiver request on the known parties -- ITT and Dow Jones & Company, Inc. -- and ITT filed several responses and objections thereto. We find that ITT received adequate notice and has not been harmed or aggrieved by the procedures followed. 18. As to the merits of the waiver request, Hilton is seeking a temporary waiver for the time period beginning after the consummation of its tender offer and continuing until the consummation of the definitive agreement to sell WPXN-TV to Paxson. If the sale of WPXN-TV were to be consummated before Hilton's tender offer is consummated, then a waiver of the cross-ownership rule would be unnecessary. If the WPXN-TV sale is not consummated prior to the consummation of the tender offer, Hilton and Bollenbach have represented that Bollenbach will recuse himself from matters related to WPXN-TV. Bollenbach and Hilton further offer that he will recuse himself, to the extent the Commission requires, from matters that come before the TWI Board that pertain specifically to any of the cable television systems located within WPXN-TV's predicted Grade B contour. 19. When considering a request for a temporary waiver of the cross-ownership rule, the Commission considers factors including the abundance of media in the market, the avoidance of "fire sales," and the size of the overall transaction and weighs these factors to determine whether the temporary waiver would cause undue harm to the public interest. As discussed below, we believe that Hilton has demonstrated sufficiently that the public interest would not be harmed by granting the relief requested to allow Bollenbach to remain on the Board of Directors of TWI for a short period of time while WPXN- TV is still owned by ITT. The waiver is conditioned on Bollenbach's recusal from involvement in decisions that may affect WPXN-TV or the TWNYC cable systems. 20. Applying each of the factors the Commission has used to allow other licensees a limited period of time to divest cable systems or broadcast stations when faced with a prohibited cross-ownership situation, we note first that the New York City DMA is one of the most diverse in the nation. Second, the interest in WPXN-TV in comparison to the overall Hilton/ITT matter is very small. Third, in this case the issue is not the avoidance of a fire sale, because a sale of the relevant entity is pending. Instead, a temporary waiver is needed to allow sufficient time for the definitive agreement to be consummated. 21. Although the overlap between WPXN-TV and TWNYC is more extensive than we generally allow even for a temporary waiver, our concerns are ameliorated by the brief period of time during which the prohibited cross-ownership will exist and the abundance of diverse media in the New York City market area. Further, Bollenbach has committed to recuse himself from all decisions that involve or implicate WPXN-TV and to delegate to Matthew Hart full responsibility for any decisions by Hilton that might be necessary regarding WPXN-TV. 22. We agree with ITT that it is important to clarify that Bollenbach's recusal from decision- making includes insulation from receipt of information concerning WPXN-TV from Mr. Hart or others affiliated with Hilton. We also agree with ITT that Bollenbach should recuse himself from matters that come before the TWI board pertaining specifically to any of the cable television systems located within WPXN-TV's Grade B contour or that pertain indirectly, but predictably, to those systems. 23. Further, in anticipation of an expedited consummation of the sale of WPXN-TV to Paxson, we will limit the period of the waiver to no more than the earlier of two months after the Commission's approval of the assignment of WPXN-TV to Paxson or six months from the consummation of Hilton's tender offer. If Hilton learns that the sale to Paxson will not be consummated within six months of the consummation of Hilton's tender offer, Hilton must advise the Commission immediately of the changed circumstances. 24. For the reasons stated above, we grant Hilton a temporary waiver of the broadcast/cable television cross-ownership rule beginning if, and when, its tender offer is consummated and continuing until the earlier of either two months after the Commission's approval of the assignment of WPXN-TV to Paxson or six months from the time its tender offer for ITT is consummated. This temporary waiver is conditioned on the recusal of Stephen J. Bollenbach, as described above, and on Hilton's assumption of ITT/Dow Jones' definitive agreement to sell WPXN-TV. This temporary waiver is subject to the further condition that if Hilton learns that the sale of WPXN-TV will not be consummated within six months from the date of consummation of Hilton's tender offer, Hilton shall immediately notify the Commission. Financial Qualifications 25. Pursuant to Section 308(b) of the Communications Act, we have required an applicant for a broadcast station license to demonstrate that it has a reasonable assurance that the necessary funds will be available to construct or acquire the station and to operate the station for three months. See Multi- State Communications, Inc. v. FCC, 590 F.2d 1117 (D.C. Cir. 1978). ITT has challenged Hilton's financial qualifications, contending that Hilton has not demonstrated the requisite reasonable assurance of financing. After review of the parties' submissions on this issue, we conclude that Hilton has demonstrated the availability of sources of funds adequate to finance the tender offer and operate WPXN- TV for three months. 26. Hilton has generally explained that it plans to obtain the funds required to consummate the ITT tender offer from a combination of available cash, working capital, existing credit facilities, borrowings under credit facilities that Hilton will seek to obtain from commercial banks and/or the issuance of public debt. More specifically, on November 4, 1997, Hilton provided the Commission with a letter from Donaldson, Lufkin & Jenrette Securities Corporation (DLJ), stating that DLJ is "highly confident" of its ability to place and/or sell securities to finance the tender offer at the increased offering price. In this letter, DLJ also indicated that it has extensive experience in the lodging and gaming industries in general and with Hilton in particular, having recently assisted Hilton in another tender offer and in the issuance of over $1.5 billion of notes. 27. Given DLJ's familiarity with Hilton and its experience in issuing various types of notes specifically for Hilton, we believe that DLJ's letter provides reasonable assurance of Hilton's ability to obtain the funds necessary to consummate the tender offer through the placement and/or sale of securities. DLJ's letter sufficiently demonstrates that adequate funds to consummate the tender offer can be obtained through the placement and/or sale of securities, should Hilton choose to avail itself of this source of funding either exclusively or in conjunction with the other sources of funding previously identified by Hilton (e.g., available cash, working capital, and borrowings under credit facilities). Accordingly, we find Hilton to be financially qualified. Alien Ownership 28. Hilton certified in its long-form application that, based on a survey of the owners of Hilton stock, it was not in violation of Section 310(b) of the Communications Act, which restricts foreign ownership of broadcast licenses. In response to the staff's request for additional information concerning the methodology of the survey, Hilton submitted a declaration from Daniel H. Burch, president of MacKenzie Partners, Inc., which conducted Hilton's foreign ownership survey. Mr. Burch has specifically confirmed that, in the Hilton foreign ownership analysis, MacKenzie Partners surveyed individual Hilton stockholders and 25 of the 30 largest custodial banks, brokerage firms and trust companies. According to Mr. Burch, registered domestic holders held approximately 30.5% of all Hilton stock and over 90% of that amount was held by individuals. On the other hand, the 25 custodial entities were reported to hold approximately 51.7% of all Hilton stock. Mr. Burch has also confirmed that the MacKenzie Partners' survey included an assessment of the beneficial stock interests held by these 25 custodial banks, brokerage firms and trust companies for the benefit of aliens (both individuals and entities). Based on this survey of 82.2% of Hilton's outstanding stock, MacKenzie Partners concluded that Hilton's level of foreign ownership is approximately 2.67%. ITT has alleged that Hilton's foreign ownership survey was incomplete and did not explicitly reflect the consideration of indirect or partial foreign ownership of the non-custodial record holders of Hilton stock. We are not persuaded, however, that the subject survey is critically flawed by virtue of these alleged deficiencies. As represented, 90% of the 30.5% Hilton stock ownership is directly held by domestic individuals. Even if all of the remaining interest held by domestic entities and all of the remaining unsurveyed 17.8% of Hilton's outstanding stock were 100% foreign owned, Hilton's level of foreign ownership would still be below the statutory 25% foreign ownership limitation (2.67% plus 3.05% and 17.8% equals 23.52%). 29. MacKenzie Partners additionally confirmed its survey of the ownership of Hilton stock by another methodology, which was based upon an examination of publicly available information and upon prior experience in conducting foreign ownership surveys. Under this analysis, MacKenzie Partners considered the Hilton stock held by large and small institutional investors for foreign entities, and, in conjunction with the Hilton stock held by domestic record holders, estimated a "worst case scenario" foreign ownership level for Hilton of 7.98%, significantly below the 25% statutory benchmark. 30. Based upon the survey conducted by MacKenzie Partners, and Hilton's certification of compliance with Section 310(b) of the Communications Act, we conclude that grant of Hilton's long-form application is consistent with Section 310(b)(4). ITT has not provided, and we do not discern, any independent basis for concluding that the survey and other information provided by Hilton is inaccurate, cannot be relied upon, or is insufficient. See Riverside Broadcasting Company, Inc., 53 RR 2d 1154, 1163 (1983). CONCLUSION 31. For all the reasons set forth above, we conclude that Hilton has demonstrated its qualifications to become a Commission licensee, and that grant of its long-form application seeking consent to the transfer of ITT Broadcasting from ITT to HLT would serve the public interest, convenience and necessity. We note that our approval of Hilton's application is permissive in nature, and merely allows the transfer of ITT Broadcasting, if and when Hilton is able to consummate its unsolicited tender offer for ITT. Grant of Hilton's long-form application is therefore warranted to comply with our statutory obligations and remove the Commission from this contest for control of ITT, which must, of course, be ultimately decided by ITT's shareholders. 32. Accordingly, IT IS ORDERED, That Hilton Hotels Corporation's application (File No. BTCCT-970304IA) for consent to interim transfer of control of ITT Broadcasting Corporation, and the informal objections directed thereto, ARE DISMISSED as moot. 33. IT IS FURTHER ORDERED, That the petition to deny File No. BTCCT-970304IB submitted by ITT Corporation IS DENIED. 34. IT IS FURTHER ORDERED, That Hilton Hotels Corporation's request for a temporary waiver of the broadcast/cable television cross-ownership rule, Section 76.501(a) of the Commission's rules, IS GRANTED, to the extent and subject to the conditions indicated above, and that its application (File No. BTCCT-970304IB) for consent to transfer of control of ITT Broadcasting Corporation to HLT Corporation IS GRANTED. 35. This action is taken pursuant to authority delegated by Section 0.321 of the Commission's rules, 47 C.F.R.  0.321 (1996). Federal Communications Commission Roy J. Stewart Chief, Mass Media Bureau