FTC May Block Turner-Time Warner Deal

Federal antitrust officials have reached “a general consensus” to block or substantially modify Time Warner Inc.’s proposed buyout of Turner Broadcasting System, government sources said Monday.

Although a final government decision on the $7-billion merger won’t come for several more weeks, the staff of the Federal Trade Commission is preparing to argue that the deal would harm competition in the cable programming market, these sources said.

However, several sources said the FTC staff may have more enthusiasm for pursuing a case than the FTC’s commissioners, who ultimately must vote for a lawsuit. As such, the staff may be seeking to pressure the companies into accepting modifications now, these sources said.

FTC staff attorneys have not made a formal recommendation about the Time Warner-Turner deal, and attorneys from the companies and the government have begun meeting in the last two weeks to discuss settling their differences. The FTC has not said what kind of modifications it desires to avoid taking the case to court, according to a source close to the companies.

Time Warner and Turner, which announced their merger plans in September, have been working for months to gain the FTC’s required approval. With the help of two high-powered law firms, Cravath, Swaine & Moore (Time Warner) and Skadden, Arps, Slate, Meagher & Flom (Turner), the two companies have filed thousands of pages of internal documents requested by FTC staff attorneys.

Consumer groups, as well as cable TV competitors and telephone companies, have told the FTC that the Time Warner-Turner deal is anti-competitive because the merged company would have too much control over popular programming seen on cable. The rivals argue that Time Warner-Turner could potentially use this control to harm companies wishing to carry this programming on cable, via satellite and through telephone lines.

Time Warner now owns HBO, the most popular pay TV channel, as well as Cinemax, and holds smaller stakes in Court TV and other channels. Turner owns CNN, TBS, TNT and Headline News, all of which are among the 15 most widely distributed cable networks in the U.S.

In addition, Tele-Communications Inc., would own 9% of a merged Time Warner-Turner as a result of its current partial ownership of Turner. That means the deal would directly link the two largest owners of cable systems, TCI and Time Warner. However, TCI has said it would place most of its voting stock under the control of Time Warner to avoid any direct involvement in the merged companies.

A Time Warner spokesman said Monday that his company is confident that the merger would receive federal approval and close in September.

The FTC’s five commissioners have been aggressive on the antitrust front of late, having voted unanimously last month to block the merger of two drugstore chains, Rite Aid and Revco. In addition, FTC Chairman Robert Pitofsky has said publicly that mergers in the defense and media industry raise special social concerns that go beyond a simple narrow reading of antitrust law.

“We are two or three weeks away, but the general consensus is to take them on,” said one official, speaking on condition of anonymity. A second official confirmed the FTC’s general posture.

Joe Sims, a Washington attorney who represents TCI, said the FTC’s ability to negotiate changes in the proposed deal may be limited because TCI holds veto power over any modification in the original terms of the merger. And, he said, “We are not interested at all in changing this deal.”