Time Warner, Turner OK $7.4-Billion Hookup : Business: Latest mega-merger creates world’s largest media, entertainment company. Plan quickly draws fire.

In the latest of a string of mega-mergers transforming the entertainment world, the boards of Time Warner Inc. and Turner Broadcasting System Inc. on Friday approved a $7.4-billion merger that would create the largest media and entertainment conglomerate in the world.

Even before the midafternoon news conference announcing the deal, however, opposition from inside and outside the two companies emerged. Critics raised antitrust and regulatory concerns, consumer groups said cable rates would rise because of decreased competition, a Time Warner business partner filed a legal challenge and smaller cable companies contended that one major Turner Broadcasting shareholder, Tele-Communications Inc., may unfairly profit from the deal to the detriment of others.

If the merger passes muster with shareholders and regulators, which could take six to nine months, it will create a global powerhouse with $18.7 billion in revenues from the world’s largest music group, the nation’s second-largest cable system, comprehensive film and animation libraries, a publishing empire with titles including People and Time magazines and a collection of some of the most popular cable TV networks, including Time Warner’s Home Box Office and Turner Broadcasting’s Cable News Network, Turner Classic Movies and the Cartoon Network. Turner Broadcasting would become a wholly owned subsidiary of Time Warner.

The deal represents a victory for Time Warner Chairman Gerald M. Levin, who has grappled with questions about his vision for the company and his management skills. The merger also indisputably catapults Turner Broadcasting chief Ted Turner, a successful entrepreneur who has often chafed at his company’s financial constraints, into the front ranks of the entertainment industry.

“I’m tired of being little all the time,” Turner, 56, said at the news conference, “and I’m looking forward to having muscle on our bones.”

The merger fits squarely into a trend of media consolidation that peaked this summer with the $19-billion acquisition of Capital Cities/ABC Inc. by the Walt Disney Co. and the purchase of CBS Inc. by Westinghouse Electric Corp. for $5.4 billion. These combinations arose in part because lawmakers in Washington are lifting regulatory restrictions throughout the industry and because emerging global business opportunities are driving a big-is-best mentality.

Although the merger was presented by its principals as a seamless integration of two complementary companies--”This merger is filled with comfort and joy,” Levin said in an interview with The Times--the announcement leaves unanswered a myriad of questions, ranging from how it will affect each company’s business partners to what role the mercurial Ted Turner will play in the huge conglomerate.

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Some investment analysts questioned whether Time Warner, in a rush to consummate a merger on the scale of the others that have taken place this summer in the entertainment industry, may be overpaying for Turner Broadcasting.

Time Warner will increase the number of its shares by 50% to buy Turner Broadcasting, putting downward pressure on the stock, which is already regarded as undervalued. Sources say Edgar M. Bronfman, chairman of the Seagram Co., whose nearly 15% share of Time Warner will be diluted to about 10%, is particularly distressed at having to hang on to the stock for a longer period to realize any gain. The reaction on Wall Street has been mixed, with several institutional investors in Time Warner bailing out.

In the wake of the merger announcement Time Warner shares rose Friday 87.5 cents to $40.625 on the New York Stock Exchange. Turner Class A shares added 12.5 cents to $28.875 on the American Stock Exchange.

Regulators are expected to carefully examine the deal’s impact on competition in the cable industry. Turner Broadcasting shareholder Tele-Communications Inc. is the nation’s largest cable operator, and Time Warner is No. 2; together they serve 40% of all U.S. households. If the deal is completed, TCI will own about 10% of Time Warner, enough to trigger regulatory review.

To allay those concerns, TCI’s shares will be placed in a trust controlled by Levin. TCI Chief Executive John Malone will not be granted a seat on Time Warner’s board and said he will be a “passive” partner.

Nevertheless, two TCI competitors represented on the Turner Broadcasting board immediately complained about what they termed “certain patently unfair elements” of the deal. Sources say that to win the approval of Malone--Turner Broadcasting’s second-largest shareholder--Time Warner and Turner Broadcasting granted TCI up to a 20-year guaranteed discount deal on the company’s programming running on TCI cable systems. Time Warner downplayed the deals made with Malone and declined to place a value on the discounted contracts.

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Representatives of the TCI competitors, Continental Cablevision Inc. and Comcast Corp., stalked out of a Turner Broadcasting board meeting late Thursday night and abstained from Friday’s vote by the Turner board.

“We are currently considering all of our options,” said a statement issued over the signature of Continental Cablevision Vice Chairman Timothy P. Neher.

Also throwing a possible wrench into the deal is U S West Inc., the Denver-based telephone company that bought a 25.5% interest in Time Warner Entertainment for $2.5 billion in 1993. The partnership controls HBO, the Warner Bros. movie studio, and Time Warner’s cable systems.

U S West on Friday sued to block the merger on grounds it creates conflicts of interest that violate the partnership agreement. The phone company’s executives, however, hinted at a willingness to negotiate a settlement. Time Warner officials said the suit had no merit.

Friday’s agreement combines two companies that have reached their influential positions in American culture by a combination of entrepreneurship and acquisitiveness.

Time Warner is the product of Time Inc., which was founded in 1922 by Henry Luce and became the nation’s leading magazine publishing company, and Warner Communications, which was formed by the late Steven Ross when he yoked Warner Bros. to a family business that began as a chain of parking lots.

Today it controls the Warner Bros. film studio, HBO and magazines including Time, People, Fortune and Sports Illustrated. Its cable system reaches 14 million subscribers.

Turner Broadcasting represents the vision of one man--Ted Turner, who used satellite and cable broadcasting to parlay a small Atlanta television station into an empire that now includes Cable News Network, the TBS and TNT cable services, the Atlanta Braves baseball team and the NBA’s Atlanta Hawks.

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Ted Turner has long been a master of the audacious acquisition. As recently as 1993 he paid $1 billion for two small film studios, New Line and Castle Rock. In 1986, he spent $2 billion to acquire MGM/UA Communications Co. for its film library; although the price was considered ludicrously high at the time, Turner’s use of the library as programming for his cable systems has enabled him to extract maximum value from the purchase. Still, within a year, the debt forced him to turn to a group of cable companies led by Time Warner and TCI for a financial rescue. In return for their $562.5-million bailout, they got the large stakes in Turner’s company that formed the bedrock for Friday’s deal.

For all that, Turner never fulfilled his dream of owning a major television network, despite two runs at CBS. As it happens, the lack of a network is seen as perhaps the major shortcoming of the newly merged company, an entertainment production powerhouse with cable access but only a modest broadcasting outlet.

Friday’s deal was the result of more than a month of sometimes public wrangling among the parties. It began to take shape on Aug. 19, when Levin and his wife, Barbara, flew to Ted Turner’s ranch in Montana to propose the merger.

“Ted was ecstatic,” said a friend.

Levin, 56, energetically pursued the deal through a sort of shuttle diplomacy, jetting to visit Malone in Denver and Turner in Atlanta to keep the talks on track. When he finally won Malone’s support, the details of the agreement took weeks of late-night sessions with lawyers and investment bankers.

Many Wall Street and industry observers see Friday’s deal as a bid by Levin to prove he is not an indecisive manager, as he has been labeled by some critics. As Time Warner’s stock price has languished and the giant company has been beset by management turmoil, some analysts have suggested that Levin’s days as chairman were numbered.

Levin, alluding to the pressure he has been under, said the structure of the deal was a vote of confidence in his abilities.

“I feel empowered to operate this company,” he said.

Nevertheless, he will now have to answer to two restless and demanding new shareholders. Malone will convert his 21% share in Turner Broadcasting into nearly 10% of Time Warner. Ted Turner will be the largest shareholder of Time Warner, with 10% equity; he will take one seat on the Time Warner board and name a second director.

“This is more positive than negative, particularly because having Ted on the board will light a fire under Jerry [Levin],” said Alan Kassan, an analyst with the investment firm of Dean Witter, Discover & Co.

Ted Turner will retain management control over the operations his company brings to the merger, as well as supervisory responsibility for HBO. That raises questions over the future role of Time Warner executive Michael Fuchs, the chairman of HBO.

Of all the concerns that could derail the merger, however, none may be as important as those of cable regulators. Washington officials worry that the merger could increase cable rates to consumers by consolidating market share in fewer hands, in this case giving Time Warner control over the most popular cable brands. Federal rules prevent any one cable company from reaching more than 30% of cable households. But together, Time Warner and TCI reach more than 40%.

Also worrisome is the ability of Malone under the deal to increase his stake in Time Warner. Under the agreement, Time Warner will revise its “poison pill” provisions, allowing a single shareholder to accumulate up to 20%, rather than the previous 15%, of the company’s stock before triggering the release of new shares that would dilute those interests.

Regulators and consumer groups are also concerned that side deals negotiated by Malone could be unfair to smaller cable operators. Under the deal, Malone would reportedly get discount rates on Turner Broadcasting and Time Warner programming to run on his cable systems for up to a 20-year period. Most cable contracts last three years.

A high-ranking lawyer at the Federal Communications Commission says the favorable treatment means that other cable operators will be paying disproportionately higher rates, placing them at a competitive disadvantage.

“This highlights some serious defects in the efforts to deregulate the cable industry,” said Bradley Stillman of the Consumer Federation of America, a public advocacy group in Washington. “With this deal, the two biggest players are never going to have an incentive to compete against each other because they both have interests in the same programming. It will make it more difficult to get unaffiliated programming on either of these systems because they will choose to put on their own.”

Though neither party would elaborate on the details of the agreement with Malone, there was some speculation that it included special agreements by Malone to carry new networks created by Time Warner.

Sources close to the Turner Broadcasting board said the Malone agreements roiled the board meeting late Thursday. Some directors were appalled because Ted Turner refused to disclose the details of Malone’s package, saying the disclosure would be anti-competitive. Ted Turner, according to sources close to the board, finally disclosed that Malone’s deal was valued at “the hundreds of millions” of dollars--a figure that may underestimate its value by a factor of five.

The sources said there were many other side agreements too complex to scrutinize and that some board members felt that Ted Turner was pressuring them to vote too hastily so the deal could be announced Friday.

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Under the merger agreement, Time Warner will issue 178 million shares of stock, currently worth $7.2 billion, to purchase the 82% of Turner Broadcasting it doesn’t already own. The value of the transaction has fallen from about $8 billion when first announced because of a 10% decline in Time Warner stock.

Turner Broadcasting shareholders will receive 0.75 shares of Time Warner stock, worth about $29.91 a share. TCI and a few other holders of Turner’s Class C stock will get 0.80 Time Warner shares, worth $31.90 per share, for their holdings.

Hofmeister reported from New York and Hiltzik reported from Los Angeles. Times staff writer Jane Hall in New York also contributed to this story.

* CAREFUL SCRUTINY: Antitrust authorities vow to closely review deal. D1

* MORE COVERAGE: D1, D3-D5