Time Warner -- Turner Talks : PROFILE: WILD CARD PLAYER : TCI’s John Malone Must Weigh Pros and Cons of Deal

Any deal involving Turner Broadcasting System has to offer a good answer to one deceptively simple question: What’s in it for John Malone?

As chief executive of Tele-Communications Inc., the nation’s largest cable operator and owner of a 21% stake in Turner, Malone can kill any deal he doesn’t like. And his history as one of the toughest, shrewdest deal-makers in the media world assures that any deal he likes will yield big benefits for him and TCI.

On its face, a Time Warner acquisition of Turner does not look like a big winner for Malone, an engineer by training who spent more than two decades building TCI from a tiny local cable operator into a national powerhouse with more than 14 million subscribers. It would strengthen a key rival--Time Warner--and thwart other possible deals that might give Turner, with Malone’s backing, control of a TV network.

But a Turner-Time Warner deal would give Malone some opportunities to substantially strengthen his cable company and extend his influence in the industry. For starters, he would make a lot of money: Malone and TCI would gain an estimated 9% stake in Time Warner, which translates into a 50% premium over the current market value of his 21% stake in Turner Broadcasting.

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That would represent a 400% to 500% return on the investment Malone made in Turner in 1987, when he led a group of cable companies that bought into the then-troubled company.

And TCI needs the money. The deal has already helped TCI’s share price, boosting it to more than 30 from the low 20s where it had been languishing since 1993--and a higher share price is important at a time when TCI is using shares to acquire new cable properties.

The company wants to expand its network and make it the foundation of a major push for expanded services in not just cable and interactive television but also telephone and wireless services.

The premium would also help strengthen TCI’s balance sheet. With $12 billion in debt and continued quarterly losses, the company was recently put on credit watch by Moody’s for a possible downgrade to junk-bond rating. Such a downgrade would have substantially increased the cost of the debt that TCI is taking on for the upgrade of its cable infrastructure and to invest in the new wireless network it wants to establish with Sprint.

Moody’s analyst John Eckes said the agency lifted the credit review of TCI earlier this year after the company committed itself to “achieving substantial leverage reduction this year and next.” Added Eckes: “The sale of its Turner stake would be a positive.”

Malone--who turned the communications world upside down two years ago when he agreed to sell TCI to Bell Atlantic, only to later back out of the deal--would be giving up a lot by going along with a Turner-Time Warner combination. He wouldn’t be able to build the media conglomerate he had hoped by getting Turner to acquire a television network such as CBS.

The deal would also end negotiations between Turner and Microsoft Chairman Bill Gates that Malone has been encouraging. Malone is minority owner in Microsoft’s new on-line service, and the two tycoons are involved in joint interactive television pilots.

But there would be other strategic advantages for Malone. He and Ted Turner, a close friend who is on TCI’s board and who would be named vice chairman of the new conglomerate, would together have a powerful 21% share in Time Warner if the deal went ahead. The two could ally themselves with Seagram for a dominant 36% share of Time Warner.

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“You are talking potential control of one of the world’s largest media companies,” said Michael Kapinski, analyst at A.G. Edwards, a St. Louis, Mo.-based securities company.

A minority stake in Time Warner could help assure that TCI gets good access to Time Warner programming, and could also assure that Time Warner cable systems carry struggling TCI programming services such as the Learning Channel, Encore and Stars.

“To the extent that [Malone] has added leverage, he is inclined to use it,” said Goldman Sachs analyst Barry Kaplan.

But Kaplan said Malone may also negotiate for a larger share of a smaller asset such as one of Turner’s programming units.