Company Town: Time Warner-Turner Talks : Deal Points Way at Time Warner

Time Warner’s proposed buyout of Turner Broadcasting, at least for the moment, seems to settle a long-fought internal debate over whether the future lies in programming or hardware.

The decision by Time Warner Chairman Gerald Levin to seek the merger appears to be a huge validation for the guys who run Warner Bros. studios, co-Chairmen Robert Daly and Terry Semel, who have long championed the view that content drives the engine, not the hardware that delivers it.

It was for this reason, Daly, Semel and others argued, that the company should retain its nearly 20% stake in Turner Broadcasting rather than sell the asset, as Levin felt increasing shareholder pressure to do as a way to pay down Time Warner’s mammoth debt.

“Bob has been very, very upset that Gerry would sell the Turner asset,” said one source. “He has been pushing harder than anyone to get Gerry to realize the value of Turner. Bob and Terry come out stronger in all this.”

Since succeeding the late Steve Ross at the end of 1992, Levin has poured billions of dollars into cable systems, driving Time Warner’s substantial debt even higher.

Over the past half a year or so, Warner sources say, Levin’s views began to moderate. Even at the recent Herb Allen investment conference in Sun Valley, Ida., it was evident in Time Warner’s presentation to investment bankers and media moguls that there was a clear leaning toward being more of a content company.

This week, right before the news broke about Time Warner’s proposed buyout of Turner, it was reported that Time Warner is reshaping its relationship with two Japanese companies, Toshiba Corp. and Itochu Corp., owners of a minority stake in its cable TV and entertainment businesses. The deal would bring Levin closer to his objective of splitting off Time Warner’s debt-ridden cable systems into a separate company.

Under the current structure, most of Time Warner’s revenues come from cable systems. If the acquisition of Turner--whose core is cable programming--goes through, the balance would be shifted toward content.

In any case, Levin finally bought Semel and Daly’s argument against cashing out the Turner stake.

What Semel and Daly didn’t figure on is that Levin, whom they totally credit with the idea, would decide to become a buyer of the entire company.

Levin discussed the idea with the two before he made the trek Aug. 19 to Ted Turner’s and Jane Fonda’s Montana ranch to go over details of what is turning out to be Hollywood’s latest mega-deal.

In taking the risk of moving Time Warner’s future toward programming, Levin seems to have eased some of the tension that reportedly existed between Time Warner’s corporate New York headquarters and its West Coast studio heads. If the deal with Turner is consummated and the integration of assets works as well as company officials hope, it will only enhance Daly and Semel’s sphere of influence and power within the company.

A deal with Turner would also seem to relieve some of Daly and Semel’s long-term tensions with Michael Fuchs, whose standing in the company may be diminished by the deal, according to some sources.

Ever since May, when he took on the added role as chairman of Warner’s highly profitable music group as a reward for his success in building Home Box Office, Fuchs has amassed increasing influence within the company. Sources say Fuchs thinks of himself as the heir-apparent to Levin.

If the merger goes through, Ted Turner would become vice chairman, the company’s largest shareholder and the most likely successor should Levin stumble.

“Michael is crazed about this,” said one executive close to Time Warner, referring to the potential acquisition of Turner Broadcasting.

On the other hand, Fuchs has “always been a fan of Turner’s,” according to a top-level Warner source, and is, along with Levin, one of three Time Warner executives to sit on Turner’s board.

The source said Levin met with Fuchs on Thursday morning. “It didn’t sound like a great meeting,” he said.

Fuchs, whose office said he is on vacation, did not return calls.

Levin undoubtedly briefed Fuchs about the proposed buyout before the Montana trip, although it’s unclear how much Fuchs was in the loop in the ensuing days. On Aug. 21, he went to Europe to deliver a speech to television executives meeting in Edinburgh, Scotland, and is believed to have returned to New York last Sunday.

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And how does Edgar feel? Another question is what happens to the nearly 15% stake in Time Warner owned by Seagram Co., which in June bought 80% of MCA Inc. for $5.7 billion. Seagram Chief Executive Edgar Bronfman Jr. is expected to eventually sell his Time Warner stake--for which Seagram paid about $2 billion--when the company’s stock rises to a level where he can make a decent profit.

People close to Bronfman say he isn’t happy about seeing his stake in Time Warner diluted by a stock deal with Turner but is keeping quiet about his views until he knows that the agreement is final and what details were negotiated.

Relations between Bronfman and Levin have never been warm, although the two used to lunch together every so often. In recent months, there has been almost no communication between them.

Even if Bronfman doesn’t like the Turner deal, there may not be much he can do about it. Bronfman was spurned in his efforts to gain a seat on Time Warner’s board, and he would need considerable support from other Time Warner stockholders--some of whom have publicly praised the Turner deal--to try to block the buyout. In addition, it’s unlikely that Bronfman would launch into a protracted battle with Time Warner, given that he is busy trying to get MCA into shape.

Times staff writers Sallie Hofmeister and James Bates contributed to this report.