Time Warner Stirs Investor Anxiety

As negotiations continued in New York to create the world’s largest entertainment company, some Wall Street investors began losing faith in Time Warner Inc.’s ability to pull off a proposed $8.5-billion merger with Turner Broadcasting System Inc.

Both stocks declined for the second consecutive trading day amid speculation that John Malone, the chairman of Tele-Communications Inc., was continuing to make stiff demands before agreeing to convert his approximately 20% share in Turner Broadcasting into Time Warner stock. Time Warner closed down 63 cents to $40.75, and Turner was off 88 cents, at $29.

“On Fridays, these stocks generally trade up because bankers are working through the weekend and an announcement is expected on Monday morning. They fall on Monday out of disappointment that the deal is not done,” said one Wall Street trader.

“The feeling on Wall Street now is that maybe there’s a deal and maybe there’s not.”

The board of Turner Broadcasting tentatively plans to meet on Thursday, perhaps by telephone, although sources close to the company said a merger pact might not be ready to be put to a vote, thereby making a meeting unnecessary.

While Malone is said to be going along with the deal, he is still thought to be dickering over the terms. Turner Broadcasting’s two largest outside shareholders, Malone and Time Warner, have the right to veto any deal worth $2 million undertaken by Ted Turner, the chairman of Turner Broadcasting.

But Time Warner and Tele-Communications can only block a sale of the company by matching the offer. Malone is not considered to be in a financial position to top Time Warner’s all-stock offer.

While most cable contracts run from three to 10 years at the most, Malone, whose company is the nation’s largest cable operator, is demanding longer commitments for Turner programming like Cable News Network and the Cartoon Network, according to sources, who say Time Warner is not favorably disposed to such terms.

Malone also wants Time Warner, the No. 2 cable company, to guarantee carriage of his struggling Encore pay television service, which analysts say has future liabilities to Hollywood studios for the rights to air movies surpassing $1 billion. “Encore’s 3 million subscribers are not going to cover those costs but getting Time Warner to carry it might move Encore to the No. 2 spot, behind Home Box Office’s 12 million subscribers, ahead of Showtime,” said one analyst.

Meanwhile, the issue of who would manage segments of a reconfigured company remained unresolved.

Home Box Office, Time Warner’s pay television service, is expected to become part of Turner Broadcasting after the merger to take full advantage of cross-promotion possibilities among the various programming services.

Michael Fuchs, the long-time head of HBO and newly appointed chief of the Warner Music group, has been holding out to retain both roles. Several sources close to the company said Fuchs has been told he can choose one and not both, but that the deal in no way turns on his decision.