Company Town: Time Warner-Turner Talks : Fine-Tuning the Big Deal : Formal Offer for Turner Could Be Just Days Away at Time Warner


A formal offer by Time Warner Inc. to buy Turner Broadcasting System Inc. for an estimated $8.5 billion in stock could be made early next week as key participants have reached agreement on the broad outlines of a deal, according to sources familiar with the talks.

“There are a lot of [legal] papers to finish,” said one source. “The share exchange is still being debated. But there’s no reason to think the deal won’t go through.”

One big question is the terms that John Malone, the hard-bargaining chief executive of Tele-Communications Inc., the nation’s largest cable operator, is extracting for his approximate 20% equity stake in Turner. Malone has the power to veto the merger proposal.


“He is in an awkward spot; he’s ambivalent,” said one source close to Malone. Though Malone may hate to see Turner’s cable programming empire fall into the hands of his biggest competitor, he could be in a sticky legal position, this source says, if he turned down such a rich deal for the shareholders he represents as a Turner board member. At $35 a share, Time Warner is paying a $15-a-share premium, based on the stock price before the news of a merger surfaced.

Another point of debate is how Gerald Levin, the chairman of Time Warner who has been on rocky ground with investors, will protect himself in the agreement against two new large stockholders, John Malone and Ted Turner, the chairman of Turner Broadcasting, who together could own more than 15% of the voting stock of Time Warner after a merger.

One provision that has surfaced would prevent Turner from voting against Levin in a proxy fight for one year, according to people close to the negotiations. Levin’s job has been increasingly vulnerable because of Time Warner’s sluggish stock price and uncertain cable strategy.

Many analysts said the merger was a clever way for Levin to reduce the possibility that a hostile suitor would buy the 15% stake in Time Warner held by Seagram Co. and force him out. Time Warner will increase its outstanding shares by about 50% to take over Turner, thereby diluting the Seagram share to an estimated 10%. Before buying MCA Inc., Seagram was considered a hostile party and was never invited to join the Time Warner board.

But, as one source put it Thursday: “Levin could lose a proxy fight in about three phone calls. This is a big risk for Gerry because he is putting a big block of stock in what you could say are semi-unfriendly hands.”

In proxy fights, shareholders can decide the fate of a company’s management and board, and after the merger, Time Warner’s biggest stockholders will be Seagram, with about 10%; Malone, whose 8% would be limited to a 5% voting right because of federal rules; Turner, with more than 10%, and the Capital Group, an investment company, with about 9%.


(Varying sets of numbers are being used by Wall Street analysts, depending on the exchange ratio of Turner shares to Time Warner shares and whether all the options and warrants are mixed into the equation.)

“Ted is happier than he could imagine because part of his brain has to be saying that he will run the company two years from now,” said one source.

Under the deal, Turner would become a vice chairman and keep his company intact as a wholly owned Atlanta-based subsidiary of Time Warner. One source said the points of negotiation that most concerned Turner were the role of his people in the company, maintaining his independence and how Time Warner would be managed after the merger.

Time Warner is known for its feuding internal culture, and some sources worry that the warring factions could only multiply after the merger.

For Malone, the Time Warner play would provide access to Time Warner’s cable networks and its vast array of programming, while possibly expanding his borrowing power.

Malone could still be a deal breaker, as he was in 1993, when his company terminated an engagement to merge with Bell Atlantic Corp.


But he and Turner have long had their sights on rocketing into the big leagues of programming, hoping before the Time Warner offer to snare CBS Inc. The problem for Malone has been capital. The expansion and upgrading of his cable networks for telephone and digital video capacity have been a continual cash drain.

Under the deal, Malone’s Turner stake translates into about 8% of Time Warner. But federal law prevents a cable system operator from reaching any more than 30% of the nation’s cable households. Together, TCI and Time Warner, the No. 2 cable operator, would reach about 40% of all households. That means Malone may control a voting interest in Time Warner of no more than 5%, which under federal rules is considered negligible.

In exchange for his equity and voting rights in Turner, Malone would get preferred Time Warner stock. Sources say the structure of these holdings is among the final haggling points of the deal.

Malone also is said to be demanding long-term rights for his cable systems to Turner’s cable programming, which includes the Cable News Network, the Cartoon Network and exclusive rights in the few markets where TCI and Time Warner cable overlap.

Sources said another demand is for long-term contracts under which Time Warner’s cable systems would carry Malone’s programming, which includes interests in the Discovery Channel, the Encore pay television service, the Black Entertainment Television network, the Home Shopping Network and the QVC Network.

Sources said the lawyers are now dickering over the prices both parties will pay under those contracts.


“The name of the game in cable and in broadcasting is to lock in long-term contracts,” said Bishop Cheen, a senior analyst at Paul Kagan Associates in Carmel, referring to the need for security as the entertainment landscape shifts. “If you are a leverage kind of guy, as Malone is, you want those long-term contracts to borrow against.”

Another uncertainty Thursday was whether a rival offer for Turner might be made by General Electric Co., which has been pursuing Turner Broadcasting for a year.