Just How Sweet a Deal Did TCI’s Malone Get? : Merger: Analysts and others are puzzling over the concessions he made to allow Time Warner-Turner pact.
John Malone, the hard-bargaining head of Tele-Communications Inc., the nation’s largest cable company, has a reputation for rarely leaving anything on the negotiating table. And from all indications, he lived up to his reputation in granting his approval for the merger of Time Warner Inc. and Turner Broadcasting System Inc.
Some critics say Malone got a “sweetheart deal” to convert his 21% equity and voting stake in Turner into Time Warner shares. But even a week after the announcement of the $7.4-billion merger, it is still unclear just how sweet a premium Malone would get. Time Warner has yet to disclose anything but the broadest brush strokes of its pact with Malone, who had the power to veto the merger. The details could be contained in Time Warner’s shareholder proxy, but that document may not be available for weeks.
In the meantime, investors, Wall Street analysts and cable competitors are puzzling over Malone’s package of concessions--and in some cases are questioning its fairness. Two Turner directors, Continental Cablevision and Comcast Corp., are even considering filing a lawsuit because of the preferential treatment they say Malone would get.
“It’s been impossible to get information from Time Warner to judge the value to Malone,” one investment adviser said. “That leaves a guilty look on their face.”
Said one Turner shareholder: “The value that went to Malone should have been spread more evenly among Turner shareholders.”
Yet Time Warner portrays Malone as generous in converting his powerful Turner interests into a “passive” stake and says other side agreements would greatly benefit shareholders. Many shareholders also say they are thrilled with the terms of the deal and consider Malone’s booty simply a price of getting the transaction completed.
Under the deal, Malone’s 66 million shares of Turner, worth about $1.5 billion before the merger announcement, would be converted into Time Warner shares valued at about $2.1 billion.
A bit more that half those shares would be converted at a premium rate because they are preferred Class C shares. Those shares are held entirely by cable companies, led by Malone, that rescued Turner from financial disaster in 1987. Malone, who invested nearly $500 million in 1987 through his Liberty Media Corp., holds about 49% of all C shares; Time Warner holds about 40%; a small number of other cable companies, including Continental and Comcast, hold the remaining 11%.
Malone negotiated on behalf of all C shareholders, who would receive 80 Time Warner shares for every 100 Turner shares they hold. All other Turner shareholders would get 75 Time Warner shares for every 100 in Turner.
Malone would get at least four other special considerations under the deal. Turner and Time Warner have agreed to sell two regional sports networks to Liberty, which analysts say would add to Malone’s efforts in building a rival to ESPN. Liberty would also receive a hefty price for an option to sell a satellite that transmits Turner’s superstation to cable operators.
But what irks Continental, Comcast--and many other cable operators--are the discount rates that Malone’s cable systems would enjoy for 20 years to run Turner’s Cable News Network, TNT and its cartoon and movie channels. The contract between Malone and Time Warner guarantees him the lowest rates in the nation on existing Turner networks, which are among the most popular, as well as any new networks.
“Watch out,” one cable executive said. “This lowers TCI’s costs.”
According to cable competitors, the lower costs could give TCI an advantage in bidding wars for additional systems as the cable industry consolidates. It could mean higher prices for competitors if Time Warner raises rates elsewhere to compensate for discounts to TCI, which serves one of every four cable viewers.
To help Turner directors determine the fairness of the deal to shareholders, Merrill Lynch & Co. assessed the Malone premium at $70 million. But some investment bankers said that figure underestimates the value by a factor of as much as seven.
One source close to the board said the valuation was based on aggressively conservative assumptions. For instance, it assumes that TCI’s cable subscribers will grow at 1% a year over the next 20 years even though the company’s historical growth rate has been much brisker.
The long-term contracts alone, one cable operator said, could be worth “hundreds of millions of dollars” to TCI.
Sources close to Comcast and Continental argue that the other cable investors deserve the same treatment as Malone because they too hold preferred C shares with special rights.
But Time Warner contends that Malone is receiving special considerations not for his voting block, but to dissolve a private legal agreement made in 1987 between Time Warner and Liberty Media aimed at keeping the two partners from overthrowing each other. Under that agreement, either party has the right to veto a purchase of Turner by the other, but can only block the purchase by a third party by matching the price in cash.
Time Warner also argues that Malone is getting special carriage rates because he buys in bulk.
John Coffee, a law professor at Columbia University Law School, said the company is probably making that argument because, although premiums to shareholders with blocking positions such as Malone’s are common, “vote buying is improper.”
He said any impropriety, however, could “be cured by approval in a vote by disinterested shareholders.” Because of the price, other shareholders are unlikely to turn down the merger.
“We got a full price--$28 or $29 a share on a stock that was languishing at $16 to $17,” said Scott Black, president of Delphi Management in Boston, which owns 300,000 shares of Turner. “Pleasing Malone was the only way to get the deal done.”
Shareholder rights advocates agree. “Investors like Warren Buffett and John Malone add value that other shareholders reap the benefits of,” said Nell Minow, principal of Lens Inc., an activist money management firm. “If you are going to follow them into an investment, you have to anticipate this risk.”
Analysts and cable sources said Malone is paying a fair price for Turner’s 44% share in SportSouth, which he has agreed to buy for $60 million, as well as for Time Warner’s 15.3% stake in the Sunshine Network for $14 million. SportSouth, which has a modest 4.1 million subscribers, would be 88% owned by Liberty; the remaining 12% share is held by Scripps Howard Broadcasting. Liberty would own 49% of Sunshine.
Perhaps the other big bonanza for TCI is Time Warner’s six-year option to buy Southern Satellite for stock and cash worth $360 million. Investment bankers have valued the business at only $110 million.
Time Warner plans to convert Turner’s WTBS Superstation in Atlanta into a cable network, thereby eliminating Southern Satellite’s primary purpose--transmitting the signal of WTBS to cable operators for a fee.
By converting TBS to a cable network, analysts estimate, Turner could recapture an estimated $100 million a year in cash flow by collecting subscriber fees in addition to the $350 million it now takes in in advertising revenue.
Ted Turner, Turner Broadcasting’s chairman, has been trying to make the switch for five years without success. One stumbling block is that games played by the Atlanta Braves, the team Turner owns, cannot be carried on cable without changing the bylaws of the National Baseball League.
One broadcaster said Time Warner probably agreed to pay TCI a high price for Southern Satellite in exchange for its carrying the TBS service.
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