Time Warner -- Turner Talks : SHAREHOLDERS : Deal Could Further Dilute Value of Time Warner Stock

Time Warner Inc.’s proposed takeover of Turner Broadcasting System Inc. may portend the creation of another media giant, but it raises the ire of some Time Warner shareholders who have been waiting patiently for years for the company’s stock to rise significantly.

The deal would result in further dilution of a stock that has languished since the 1989 merger between Time Inc. and Warner Communications.

If the deal goes through, Time Warner would issue nearly 200 million new common shares, increasing the shares outstanding by nearly half from their current level of about 380 million.

Such a move would come as yet another frustration for shareholders who bought Time Warner stock with the expectation of heady gains.

Even though the company has paid down nearly $9 billion in debt by selling off non-core assets, and has itself been a rumored takeover target, the stock price today is below the $45.75 it fetched shortly before the Time-Warner deal was consummated in July, 1989.

Because of the huge debt taken on to finance the deal, Time Warner’s bottom line is still in the red.

“While this [Turner deal] might be a great strategic move that may pay out some time in the future, in the near term . . . the stock is unlikely to do anything . . . unless management can clearly define what they’re going to do,” said Guru Baliga, a portfolio manager who oversees pension fund investments on behalf of IDS Advisory Group in Minneapolis.

At the very least, some shareholders think that Time Warner would pay a premium in the proposed stock swap deal, which is valued at more than $8 billion.

“What they’re doing is giving up their stock . . . at wholesale price . . . and paying retail for Turner,” said Laura Linehan, a research analyst at Gabelli & Co., which holds a substantial percentage of Time Warner stock. “I don’t want to say it’s a bad deal; if they bring Turner in, it’s a very strong asset. . . . [But] I think that it could have been structured better.”

Reflecting shareholder doubts about the deal, Time Warner’s stock lost 87.5 cents a share Wednesday (adjusted for going ex-dividend Wednesday) to close at $41.375 in trading on the New York Stock Exchange, after trading as low as $40.25 during the day.

Of course, not all shareholders are dissatisfied. Many see long-term potential for shareholders if the deal results in the efficient integration of Time Warner’s and Turner’s admittedly valuable assets.

“It would dilute earnings and the private market value of Time Warner,” said Ernest Wiggins, manager of three Dreyfus investment funds that hold more than 1 million shares of Time Warner. “But I’m willing to trade the discount in the private market value to gain Turner’s input into management, and to gain the increase in [programming] content.”

Turner would contribute a library of classic movies, as well as cable networks such as CNN, to the merger. Time Warner already has music, publishing, movie and cable operations, including HBO.

“In the short term, any time a company makes a large acquisition, the acquirer’s stock tends to go down a bit,” said Gordon Crawford, senior vice president at Los Angeles-based Capital Research, which hold about 9% of Time Warner stock on behalf of its clients. But, he added: “I think they’re paying a fair price for the crown jewel assets of [Turner’s] business.”

“I’m never happy to be diluted,” said Brian Grove, a fund manager at the John Hancock Funds, which holds about 3% of the stock. “But I always look at the picture as a whole. Maybe there will be some moves between where we are now and where we’re headed, and it could be positive for Time Warner.” He added: “I’m thinking about buying more.”

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Staff Writer Tom Petruno contributed to this report.