$8.5 Billion for TBS Looks Pricey, Some Analysts Say : Merger: Turner Broadcasting shareholders would benefit from being paid with undervalued Time Warner stock, some contend. Negotiations continue.

As lawyers and investment bankers representing Time Warner Inc. and Turner Broadcasting System Inc. continued to negotiate a proposed $8.5-billion merger, some Wall Street analysts began questioning whether the entertainment giant’s offer might be overpriced.

No formal announcement of a merger is expected before next week, according to people close to the talks. Time Warner is proposing to exchange 0.75 shares of its stock for each share of Turner Broadcasting and to make Turner a subsidiary.

Although the terms are regarded as generous for Turner shareholders, one analyst who requested anonymity called them “dreadful” for investors in Time Warner. That is because the company is paying for Turner with Time Warner stock that is selling far below the estimated per-share value of the company’s assets.

Gerald Levin, the chairman of Time Warner, has tirelessly reprimanded Wall Street for underappreciating the company, whose stock price has increased only 3.4% since the beginning of 1994 even as the Standard & Poor’s 500 stock index has climbed 22%. Time Warner shares closed Friday at $41.375, down 75 cents.

“Time Warner is paying a huge premium for Turner,” in effect diluting current shareholders, one analyst said.

He said that based on Time Warner’s 1996 cash flow projections, the stock should be valued at $68 a share.

But the terms of the merger are based on today’s prices, and Time Warner, in effect, would be using a devalued currency. By this reasoning, according to one analyst, Time Warner would really be paying about $50 apiece for Turner shares.

Before the news of the proposed merger, which values Turner shares between $32 and $34, those shares were trading in the low $20 range. Analysts have estimated that Turner’s assets are worth between $28 and $35 a share.

Turner stock has been held down by the company’s $2.5-billion debt and by its limited flexibility to expand: Two big stockholders, Time Warner and Tele-Communications Inc., have veto power over Chairman Ted Turner’s acquisitions.

So far, Wall Street has been mildly supportive of the proposed merger. Since the news surfaced Wednesday, Time Warner shares have dropped only $1 overall. Class A shares of Turner Broadcasting dropped on Friday for the first time since the news, falling $1 to $29.875, suggesting some doubt that a deal would be finalized.

“Wall Street likes any deal that combines content with content or content with distribution,” said one entertainment finance expert. “It is buying this synergy story, believing that cash flow will grow even without the old-fashioned benefits of synergy, where heads roll and costs are cut. This is trust-me synergy, and even Michael Eisner can only get away with it for a couple weeks.”

The source referred to the chairman of Walt Disney Co., who on July 31 announced plans to buy Capital Cities/ABC Inc. for $19 billion using cash and stock. The promised payoff is to come primarily from the global cross-selling benefits of tossing Capital Cities’ brand names into Disney’s marketing machine, along with distributing Disney products on ABC.

Despite the initial enthusiasm for that acquisition on Wall Street, Disney shares have lost nearly $500 million in market value in recent weeks.

Still, most Wall Street analysts and investment bankers said it is implausible to use the future value of a company’s stock price to negotiate deals today.

“When you are using equity to value a deal, you can fool yourself into thinking your stock is worth more than its market value, but who’s going to buy that argument?” said Jeffrey Logsdon, an analyst at the Seidler Cos. in Los Angeles.

On Friday, lawyers were still negotiating what terms John Malone, the chief executive of Tele-Communications, would get for his 20% of Turner Broadcasting. Malone was thought to be getting a higher value than most Turner shareholders, receiving 0.80 share of Time Warner stock for each Turner share.

Although Malone returned to Colorado for the weekend, his lawyers were angling to get favorable terms for his cable networks for Turner programming such as Cable News Network and rights to New Line Cinema films for his Encore pay television service.

Turner and Time Warner officials have also been discussing how the companies might be integrated, including the possibility of moving the Home Box Office pay television service under Turner Broadcasting, according to several sources. That has raised the ire of Michael Fuchs, the head of HBO and the newly anointed chairman of Warner Music.

Levin apparently broached the subject in what turned into a testy telephone conversation on Thursday with Fuchs, who objected to reporting to Ted Turner.

Fuchs and Levin are scheduled to meet early next week to resolve the issue, sources said.

It is unclear what the merger means to another Time Warner partner, US West, which now has 25% equity in a partnership that owns HBO, Warner Bros. studio and most of Time Warner’s cable systems.

The two other investors in the partnership, Toshiba Corp. and Itochu Corp., agreed Friday to convert their 5.6% equity stake into $800 million in preferred Time Warner shares, convertible to common stock that would be worth about 3% of the company. One Wall Street analyst calculated that at a 16.5% annual compounded return over three years.

A source said that would make US West’s 25% share worth about $3.5 billion.