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H’wood joins Turner network

Hollywood got a new mogul Tuesday. Ted Turner convinced his board to plunk down about $ 630 million in cash and stock to buy powerhouse indies New Line Cinema and Castle Rock Entertainment just as Sony hammered out an agreement to keep distributing about 20 Castle Rock pics for another four years.

The deals give Turner, the Atlanta cable entrepreneur, the right to spend $ 750 million to $ 1 billion on film production for the next three or four years. That money is expected to come from operating income and about $ 750 million in available lines of credit.

While Wall Street was touting the move as the deal of the year, Turner sources acknowledge the whole scheme as a work in progress. One example: the parties haven’t ironed out who will distribute Castle Rock’s pics overseas.

The town’s latest “studio” bears little resemblance to the traditional definition — it has no lot. Instead, it mirrors the Polygram model of merged entities — an amalgam of autonomous production and distribution arrangements.

Although Turner pulled off the acquisitions in one broad stroke, the buyouts were totally separate scenarios.

Turner is acquiring New Line in a tax-free stock transaction valued at about $ 530 million.

Under terms of the proposed merger — which awaits New Line shareholder approval — each outstanding share of New Line common stock will be converted into 0.96386 shares of Turner Class B common stock, which closed Monday at $ 23. 50 per share. If the final agreement is based on Tuesday’s closing –$ 24.125 — the total value could be boosted to $ 543 million.

Turner will issue up to 21 million Class B shares to cover the 17.4 million shares of New Line currently outstanding, options, warrants and $ 30 million of convertible debt securities. And, it will assume another $ 55 million in long-term bank debt.

The deal makes New Line chairman Robert Shaye and president Michael Lynne rich men. Shaye’s 4.5 million New Line shares guarantee him about $ 105 million, while Lynne’s 850,000 shares will be worth about $ 20 million, based on Tuesday’s closing.

It also gives them a chance to produce high-end films. The Turner arrangement will allow Shaye and Lynne to eventually produce a couple of grade A pictures a year.

A New Line press release said the deal was subject to completion of due diligence and definitive agreements, including Shaye’s and Lynne’s employment contracts. Both principals are expected to have at least five-year pacts.

The New Line transaction is scheduled to close no later than Feb. 28, 1994.

Under the $ 100 million Castle Rock arrangement, the five founding partners will retain their control for seven years.

Castle Rock sources described the deal as a cash payout with dollars distributed to the indie’s owners along equity lines: Sony owns 44%; Castle Rock partners own 42%; and Westinghouse holds 15%. But others involved in the deal say Sony and Westinghouse were offered cash while Castle Rock partners were given Turner stock.

Under the deal terms, Castle Rock partners would get a commitment from Turner to cover overhead, to fund its pictures and TV programs, and to help achieve its objective to become a major film entity. That means Castle Rock, which currently produces about six pics a year, could eventually ramp up to 12 to 15 annually.

Eventually, Castle Rock would be distributing its own pictures domestically. But that is not expected to occur before 1998, which is where Sony comes in.

Sources involved in the deal said Tuesday that Sony Pictures Entertainment will:

o Continue its domestic theatrical distribution of Castle Rock pics — about 15-20 new films plus the nine under its current distribution pact — through 1997;

o Pick up some video distribution of titles under a back door arrangement with New Line, which currently holds those rights;

o Get fatter distribution fees (above the current 12-14% rent-a-system rate);

o Remain the worldwide distributor of Castle Rock’s TV productions, including the hit show “Seinfeld,” through 1996.

SPE doesn’t have to spend a dime for production.

“We’re excited about being in business with Castle Rock and Turner,” said Alan Levine, president and chief operating officer of SPE’s filmed entertainment group. “Turner provides a very strong entrepreneurial approach. This deal is designed to facilitate an expanded production slate and independence for Castle Rock.”

Insiders say Westinghouse, which holds 15%, is expected to take the money and run.

The decisions came after three long days of intense haggling among execs from SPE, Castle Rock and Turner.

“We are delighted with this new strategic alliance. It is consistent with our longterm goal … of being without reliance on outside financing, which is what hurt us in the past,” said Castle Rock principal and co-founder Alan Horn.

He noted that Castle Rock will probably retain some control over foreign distribution, with SPE expected to distribute in several territories.

Despite Turner’s two new hefty commitments, the investment community embraced his maneuvers. Turner’s stock has shot up 17% since Daily Variety broke the story Aug. 5. New Line closed yesterday at a 52 week-high of $ 18.875, up $ 1. 625.

Smith Barney analyst John Reidy said the New Line portion of the deal will not dilute TBS earnings and could even add to their value; Smith Barney estimates New Line will earn about 45 cents a share this year.

There doesn’t seem to be any alarm over Turner’s future production spending plans, particularly on the New Line side.

New Line, a profitable entity in its own right, is not expected to represent a significant drain on Turner’s resources, since it currently funds most of its own films inhouse. But Castle Rock, which has been seeking up to $ 200 million in production financing, will undoubtedly represent a bigger commitment, since its pictures carry heftier budgets and it doesn’t own a film library to exploit.

One surprise for some yesterday was the backing of Time Warner, which controls three board seats and 18.6% of TBS’ stock.

No one would comment on whether TW approved the acquisitions or simply abstained from voting. But sources said since TW did not try to block the deal during yesterday’s four-hour board session, this may represent an attempt by TW to buy some of Turner’s goodwill for later negotiations.

Speculation was all over the map as to TW’s motive. Some said the media giant could sell some of its stake to Tele-Communications helmer John Malone — a major supporter of the Turner acquisitions — and swap the remainder of its holdings for some Turner assets. Others had Turner selling off his coveted CNN to TW, boosting the Time Inc. empire.

One banker said some have gotten carried away.

“Ted is not going to risk everything on this deal. He hasn’t fallen in love with Hollywood. … You’re going to see a prudent approach to increased production,” he said.

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