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Time Inc. Moves to Buy Warner, Foil Paramount

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Times Staff Writers

After studying its options for nine days, Time Inc. took rapid-fire actions Friday to try to demolish a hostile takeover bid and press ahead with a friendly Warner Communications Inc. merger--this time offering to acquire Warner in a two-step deal valued at $14 billion.

However, Paramount Communications Inc. immediately vowed to pursue its hostile $10.7-billion bid for Time. And, on Wall Street, many speculators were steaming with rage. Some traders expressed disbelief that Time’s directors would spurn Paramount’s $175-a-share cash offer without coming up with some alternative that would include cash for Time shareholders.

Battle Not Over

From every quarter, analysts and investors declared that the battle for Time is by no means over, and skirmishes are already under way in Delaware and New York courts.

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Some heaped criticism on Time for preparing to assume billions of dollars of debt after it had harshly condemned others--including Paramount--for putting their companies in hock.

Time’s and Warner’s top executives hailed the deal, however, as consistent with the goals of the original stock-swap merger, negotiated in March, which would have created the world’s largest media and entertainment company.

And the institutional investor that holds the largest stake in all three companies threw its weight behind the new Time-Warner deal. The clients of Capital Research Co. will be “invested in the greatest media entertainment company in the world,” said Gordon Crawford, senior vice president of the Los Angeles-based company. “Speculators and arbitragers are short-term investors. We are trying to invest our clients’ money on a long-term basis, and Time-Warner is going to be a great long-term investment.”

If the merger is completed, the new company will own the nation’s most lucrative recorded music and magazine publishing businesses, the largest television programming operation for both pay-cable and prime-time network television, and cable TV franchises second only to Tele-Communications Inc. of Denver.

Time’s magazine division publishes Life, Fortune, People, Money and Sports Illustrated, in addition to the news weekly for which the company is named. In cable television, the company owns Home Box Office, the nation’s largest cable programming service, and 82% of American Television & Communications, the nation’s second-largest cable TV company.

Warner, for its part, also contributes cable systems, in addition to its Warner Bros. studio, the recently acquired Lorimar Telepictures TV production company and the record labels of Atlantic, Elektra, Asylum and Nonesuch in addition to Warner Bros. Records, whose roster includes such artists as Madonna and David Lee Roth.

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Unlike the original stock swap proposed by Time and Warner, which needed the approval of both companies’ shareholders, the new deal is being carefully crafted to avoid such a vote. The Time board is empowered to make an acquisition--even of this magnitude--and the Warner board on Friday unanimously recommended the new deal to its shareholders.

Shareholder Meeting Reset

Time has set a new date for a shareholder meeting, June 30, but the most provocative issue on the agenda will be the reelection of three Time executives to the 12-member board--not the deal itself.

Beginning Monday, Time will use a carrot-and-stick approach to encourage Warner shareholders to quickly tender their shares for $70 each, by offering cash for just 50% of the company’s 200 million shares.

The second stage of the offer will involve some cash, but it will also include stock or debt securities. The formula is yet to be negotiated, the companies said. The value of the combined cash and paper is expected to equal $70 a share, Time and Warner said.

The deal’s structure vexed those investors who would prefer to wait and see if a higher bid for Warner will materialize. Complained one: “It’s a coercive two-tier offer.”

More than 8.2 million shares of Warner changed hands Friday, making it the most active issue on the New York Stock Exchange, with the stock closing at $59.25, up $3.625. Time, meanwhile, dropped $9 to close at $162.50 on a volume of nearly 3.3 million shares.

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Some traders said the prices reflect Wall Street’s disbelief that the new combination will withstand court challenges or perhaps a new bid for Time or Warner.

The days and nights leading up to Friday’s agreement were laden with debate, leaving Time and Warner executives hoarse with fatigue and--by Thursday night--entirely without sleep.

Enraged by Paramount

The Time board met four times and the Warner board convened twice during the tense days after Paramount’s surprise bid.

In a lengthy interview by telephone, Warner Chairman Steven J. Ross gave vent to his anger that Paramount--a partner of Warner in a movie theater business--tried to break up the Time-Warner merger.

By its hostile action, Paramount appears to have so enraged Time and Warner that the two companies are determined that Time will never fall into Paramount’s hands.

“All (Paramount Chairman Martin S.) Davis has done is assure the eternal enmity of some of the biggest guys in the industry and a bunch of lawyers’ bills,” said one investment community source.

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Paramount’s own independence may now be in jeopardy. Wall Street sources have repeatedly said they believe Time has encouraged bankers to search for potential buyers for Paramount, even suggesting that Time would help finance such a bid.

In interviews, however, those stories were denied by Time Chairman J. Richard Munro and President Nicholas J. Nicholas Jr.

In addition, Munro, Nicholas and Ross insisted that Time and Warner directors never raised the issue of their own vulnerability to shareholder suits during their board sessions this week.

Both companies said that the boards obtained written opinions from their financial advisers that the terms of the new deal are fair.

In a separate action, Time’s board formally and unanimously rejected Paramount’s offer as “not in the best interests of Time, its stockholders and its other constituencies.”

‘Repugnant’ Defense Triggered

Time and Warner triggered one of their defenses most repugnant to Paramount by exchanging large blocks of stock. As a result, Time now holds 8.7% of Warner’s voting shares, and Warner owns 11% of Time.

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Time’s combination of actions will push the next rounds of battle into the courts.

To succeed with its offer, Paramount must deal with two formidable roadblocks: Friday’s stock swap between Time and Warner, and Time’s tender offer for Warner.

The stock swap is an obstacle because Warner would be unlikely to tender its block of Time shares to Paramount, but, if it did, the newly issued shares of Time would add hundreds of millions of dollars to Paramount’s takeover costs.

Paramount’s original offer was contingent on the elimination of the stock swap agreement--which it criticized as an illegal anti-takeover “lockup.” In a lawsuit in Delaware courts, it has argued that the exchange violates Time shareholders’ right to consider the highest offer for their shares.

Although a Delaware judge last week refused to temporarily restrain Warner and Paramount from swapping the blocks of stock, he has not yet considered the merits of the case. One legal scholar, Prof. John C. Coffee of Columbia University, said the Delaware court might ultimately decide that the swap violates Delaware’s anti-takeover statute.

Paramount’s second legal task--and perhaps a more difficult one--will be to successfully challenge Time’s offer for Warner. Paramount has not filed any such challenge, but many observers expect it will do so within days.

As they tangle over this issue, Time and Warner are likely to contend that the decision to make the offer was a management decision that is not subject to any review by the courts. Paramount may argue that the offer was nothing more than a defensive maneuver designed to entrench the current management and ward off a higher offer for the company.

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If the courts find that it was a defensive ploy, they have some latitude to void it as an infringement of shareholder rights.

‘Ordinary Business Decision’

In Coffee’s view, Paramount may have a tough time persuading the court on this point, because such offers are the kind of decision that boards of directors are usually entitled to make without being second-guessed. “This is the kind of ordinary business decision on which there is usually no judicial review,” he said.

The powerful Delaware court may have already influenced Time’s strategy, some analysts said, because of a ruling against Interco, a diversified manufacturer. After Interco’s management recapitalized the company and issued a big dividend, the courts held that its maneuvers constituted a takeover defense, effectively putting the company up for sale.

In light of that ruling, one analyst said, Time directors may have decided against placating their shareholders with a fat dividend.

But Time Vice Chairman Gerald M. Levin insisted Friday that the Interco case didn’t “affect the way we looked at any alternative.”

The Paramount team heard about the tender offer during a regular morning conference call Friday among Paramount executives, lawyers and investment bankers. The announcement began a frenzy of activity, but Paramount team members said they did not plan to work around the clock through the weekend to prepare a counterpunch.

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Won’t Act Precipitously

“We don’t feel any need to act precipitously,” said one person close to Paramount, noting that many details of the Time offer will not be available until a formal tender offer is made. “We think the difference in the share prices is going to show the difference between the deals.”

Paramount, however, still faces regulatory hurdles in obtaining governmental approvals to transfer cable TV licenses on local or state levels, along with certain other licenses at the Federal Communications Commission.

Kathryn Harris reported from Los Angeles and Paul Richter from New York.

RELATED STORIES: Business, Page 1

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