Turner’s Quest for CBS Seemed Doomed From the Start

The end of Ted Turner’s nearly four-month campaign to take over CBS Inc. confirms what many Wall Street professionals said about the bid from its outset: It had virtually no chance of success.

Yet, Turner’s bid made more than a ripple in the financial markets after he announced it April 18. It has consumed millions of dollars in CBS revenue for legal and investment banking fees; earned at least $8 million in fees for E. F. Hutton, Turner’s financial adviser, and involved countless hours of professionals’ time spent analyzing and appraising the strip of nine exceptionally risky securities that Turner offered for each share of CBS voting stock.

For those reasons, the bid raises many issues for analysts on Wall Street and broadcasting regulators in Washington.

Turner’s bid had a certain amount of appeal to investors with a short-term outlook. But, at the same time, it would have left CBS in such a devastated financial condition that the company’s survival would have been in doubt.

Also, it underscored the uniqueness of broadcasting as a regulated industry. Many analysts believe that Turner might have been successful but for the Federal Communications Commission, whose rules require lengthy analysis of any change in control of a broadcasting company while restricting a bidder’s accumulation of stock in the target.

“The fallibility of any hostile takeover (in broadcasting) is the fact that the aggressor has to go through such an elaborate process,” says Edward Atorino, an analyst for Smith Barney, Harris Upham & Co. “If Turner could have presented his bid quickly, he could have had CBS back on its heels. But he had to go to the FCC, where things drag on and on. That gives the target company a chance to develop a very sound strategy.”

For that reason, Atorino says, “Turner’s been arguing to accelerate the process.”

Knowing time was Turner’s enemy, CBS, in contrast, criticized FCC officials in public--and before Congress--whenever they hinted that they were willing to streamline the approval process.

Turner, through his Atlanta-based Turner Broadcasting System, on April 18 offered a no-cash package of nine high-yield, high-risk “junk bonds” with a face value of $175 for each CBS share. CBS stock was then selling for about $110, largely on takeover speculation.

In light of Turner’s own doubts and those of the investment community that a combined CBS-TBS could muster the necessary cash flow to cover the bonds’ interest and principal, Wall Street analysts appraised the true value of the offer at as little as $120 per share. Nevertheless, “in a certain sense, the offer was given more credibility than it deserved,” Atorino says.

The offer had such manifest shortcomings that some people questioned whether Turner had an ulterior motive in pursuing the bid. “We think, as time unfolds, the absurdity of this thing will become increasingly clear,” said one investment banker hired by CBS to evaluate the offer.

However, Reese Schonfeld, the former president and a co-founder with Turner of Cable News Network, says, “I don’t think he had a hidden agenda. Three years ago, he launched a bid for a fourth network, because he wants a chance to get his voice out to a large number of people.”

By mid-April, only CBS of the three networks was even speculatively within his reach. NBC’s improving results placed it and its parent, RCA, beyond his reach. ABC was the weakest network financially and operationally, but Capital Cities Communications beat Turner to the punch by reaching a negotiated deal to acquire that network.

That left CBS, “and it was a matter of his having nothing to lose,” Schonfeld says. He was tying up no cash, Hutton’s advisory fees were limited to $8 million unless the bid was successful and the potential payoff was astronomical.

Turner’s offer was fashioned to appeal to short-term traders, who might be able to make a profit by selling out quickly before the merged companies’ weakened financial structure became more generally apparent. His bonds’ high-interest yield offered the prospect of a seven-fold increase in current income over CBS’ existing dividend, although how long the interest pay-out could continue was a matter of doubt.

To survive, the combined company would have needed a rate of growth in revenue well in excess of 11% a year, in contrast to Wall Street estimates of a broadcasting industry growth rate of less than 8% in the near future.

Even optimistic scenarios forecast insolvency for the combined company by 1990 or 1991--and CBS financial advisers argued that even a solvent company would have problems gaining access to credit markets, a necessity for the refinancing of Turner’s debt storm in the late 1980s.

That raises the question of who would benefit in the long term from a junk-bond takeover of CBS.

Consider the investment community. Wall Street thrives on the exchange of paper, because it derives its income from transactions, regardless of their value to the principals on either side of the deal.

On the other hand, “it would have wrecked the company, I don’t think there’s any question about that,” says David Londoner, an analyst for Wertheim & Co. “The people who would be disadvantaged would be clearly the employees of CBS and the general public.”

A debt-laden network would have trouble financing the creation of new programming, and the $2 billion in asset sales that Turner was contemplating would have stripped the company of some profitable units.

By all estimates, the absence of cash in Turner’s bid was its most glaring fault and the crucial opportunity for CBS. The network defeated Turner not by appealing to Wall Street’s sensitivity to the value of a well-capitalized company but by the exercise of superior investment banking.

CBS last month initiated a repurchase of more than 21% of its stock, converting that stock to debt and adding bond and preferred-stock covenants restricting the accumulation of further indebtedness.

This ruled out any transaction as highly leveraged as Turner’s and provided shareholders with a gratifying cash pay-out, but it stopped short of overburdening CBS with debt of its own creation.

Turner said publicly that the completion of CBS’ repurchase offer would kill his bid, and he turned to the courts for his last stand. When a federal judge on July 30 in Atlanta refused to block the repurchase, the bid was dead but for the formal announcement that came Wednesday.