Creating an Entertainment Giant : DISGRUNTLED PARTY : US West Says Deal Would Create Conflict of Interest

US West Inc.’s suit against Time Warner Inc., seeking to block the media company’s acquisition of Turner Broadcasting, contends that the deal would create a conflict of interest.

But executives and investment bankers close to the Time Warner-Turner negotiations are skeptical that US West’s suit, filed in Delaware Chancery Court, has merit. They say it could be a bargaining move to improve the terms upon which the telephone and cable company exchanges its entertainment stake for shares in Time Warner.

The suit claims the proposed purchase of Turner Broadcasting System Inc. breaches a contract Time Warner signed in 1993, when US West invested $2.5 billion for a 25.5% stake in Time Warner Entertainment. That partnership was launched in 1991 to pursue film, television and video entertainment opportunities.

“Turner Broadcasting System is engaged in precisely those businesses,” the suit says, and is “one of the largest and most vigorous competitors” of the partnership.

In addition to its breach-of-contract claim, the suit alleges that Time Warner, as general partner of the alliance, failed in its fiduciary duty to the limited partners.

Richard McCormick, chairman of US West, said the merger would “create innumerable conflicts of interest and violations of fiduciary obligations.”

Time Warner Chairman Gerald Levin said the lawsuit has no merit.

US West was one of three companies that bought a stake in Time Warner Entertainment in 1993. The other two are Japan’s Itochu Corp. and Toshiba Corp., which contributed a total of $1 billion for a 12% share.

Time Warner, which owns 63% of the partnership, has been eager to regain control of the assets to separate cable from other holdings, including the prized Home Box Office.

Itochu and Toshiba recently agreed to exchange their combined stake in the partnership for Time Warner shares. Englewood, Colo.-based US West, however, has been reluctant to participate in the swap for fear that it would have less leverage owning Time Warner shares than with an equity stake in a partnership.

According to the 1993 agreement, none of the parties can compete with the partnership, called Time Warner Entertainment Co. LP.

The agreement stipulates that none of the partners can “engage directly or indirectly [whether by operation, investment or otherwise] in any co-managed business or any programming and filmed entertainment business.”

Turner Broadcasting owns several cable networks, including TNT, that compete directly with the partnership’s Home Box Office. It also owns movie studios.

The suit claims Time Warner usurped an opportunity that belonged to the partnership. At the time the agreement was signed, the suit alleges, Time Warner told US West that it intended to sell its 18% stake in Turner Broadcasting or exchange the stake for Turner Broadcasting assets that would be contributed to the partnership.

The suit says Time Warner “commandeered” a top executive from the partnership to negotiate its acquisition with Turner Broadcasting. The suit also alleges that executive Joseph J. Collins, chief executive of Time Warner Cable, a division of the partnership, used knowledge gained from the operation of the partnership to betray its interests.