The owner of KGMB9 said recent financial losses at the station were "unsustainable," prompting the decision this week to turn over the bulk of its business to competitors KHNL and K5.

MCG Capital Corp. purchased KGMB for $40 million in 2007 and since then watched the value of its investment in the local television station plunge by $18 million.

KGMB, KHNL and K5 announced Tuesday they plan to merge newsrooms, cut about a third of their staff and simulcast some news programs starting as soon as November.

The merger of news operations at three of Honolulu's top five local broadcasters will likely be the subject of legal challenges by local media watchdogs, who see the deal as an attempt to skirt federal rules barring ownership of multiple stations in a local market.

But MCG and Raycom Media, KHNL and K5's owner, say the arrangement passes regulatory muster and is necessary to preserve local television stations hard-hit by the economic downturn.

In recent filings with the Securities and Exchange Commission, MCG outlined the financial troubles that led to the talks with Raycom.

MCG wrote down the fair value of its $40 million investment in KGMB by more than 45 percent to $22 million.

The financial woes were in spite of improved ratings, the successful launch of a morning show and the $12 million sale of KGMB's longtime headquarters on Kapi'olani Boulevard last year.

"It was unsustainable," said MCG Executive Vice President Hagen Saville.

KGMB, the only television station owned by Arlington, Va.-based MCG, was supposed to be the flagship of a fledgling media empire.

But that plan fell apart when the global economic downturn sent the television advertising market into a nosedive.

Since 2006, combined advertising revenues at Hawai'i's major television stations has dropped nearly 30 percent from $68 million a year to $48 million a year. MCG's projections put the market at around $45 million this year.

Under the shared service agreement between KGMB, KHNL and K5, MCG's cost will drop sharply but it also will become a much smaller player in the Honolulu media market.

MCG will get the revenues from the smaller of the three stations, K5, while Alabama-based Raycom Media will get revenues from CBS affiliate KGMB and NBC affiliate KHNL.

All three stations will share costs for news gathering and production but will keep separate sales staffs.

According to Saville, MCG began talks with Raycom Media seven or eight months ago.

Rather than selling the station to a buyer that might gut the operations, MCG began pursuing a shared service agreement that would consolidate the news and production functions of the three stations.

Raycom and MCG believe the shared service agreement doesn't require approval from the Federal Communication Commission because there's no change of ownership and the licenses of the stations aren't being transferred.

Raycom has similar arrangements involving two stations in Columbus, Ga., and Wilmington, N.C.

An Illinois-based television company, Barrington Broadcasting Group LLC, operates a three-station shared service agreement in Syracuse, N.Y.

Chris Conybeare, president of Media Council Hawai'i, believes the deals are open to challenge.

Conybeare said he's talked to several public interest lawyers on the East Coast who believe that such deals raise dual-ownership and antitrust questions.

"We are exploring all available legal remedies," he said.