$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 deal is 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 shares of its stock for shares of Turner Broadcasting and to make Turner a separate division of the company.

While the terms being discussed are regarded as generous for Turner shareholders, one analyst called them “dreadful” for investors in Time Warner. That is because the company is paying for Turner with Time Warner stock that has under-performed the market in the past two years.

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 & Poors 500 Index has climbed 22%. Time Warner shares closed Friday at $41.375.

“Time Warner is paying a huge premium for Turner,” 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, is using a devalued currency to pay for the merger, according to one school of thought. 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 on Wednesday, which values the shares at about $34, Turner shares had been trading in the low $20 range. Analysts have estimated their worth at between $28 and $35 apiece.

Turner stock has been held down by the company’s $2.5-billion debt and because of 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, losing 75 cents Friday. Class A shares of Turner Broadcasting dropped for the first time on Friday since the news, falling $1 to $29.875, suggesting some doubt that a deal would be finalized.

That still far surpasses the $23.625 a share closing price for Turner on Tuesday.

“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 analyst 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 as the shares dropped from a peak of $61.50 after the news, to close Friday at $56.

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

And some investors in Time Warner believe that the company will benefit from the sheer size of the combined companies.

On Friday, lawyers were still trying to negotiate what terms John Malone, the chief executive of Tele-Communications Inc., would get for his 20% equity stake in Turner Broadcasting. While most Turner shareholders were expected to get 0.75 shares of Time Warner for every one of their Turner shares, Malone was thought to be getting a higher value of 0.80 shares.

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.

The deal could founder on those details. But one investment banker said Malone has a right to be demanding. “He did more to build Turner than anyone,” this person said, adding that Malone put together the consortium of cable operators who bought a 40% chunk of Turner and helped bail him out after he paid dearly for the MGM film libraries.