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High noon for Turner

Ted Turner today is expected to overcome a major obstacle to becoming a player in Hollywood. Barring unforeseen opposition, he will elicit approval from his 14-member Turner Broadcasting board of directors to acquire indie film companies New Line Cinema and Castle Rock Entertainment.

In Hollywood, meanwhile, representatives of Castle Rock and Turner were huddled with Sony execs Alan Levine and Jonathan Dolgen last night, trying to hammer out revised terms under which Sony would continue to distribute Castle Rock product over the next three years. Sony owns 44% percent of Castle Rock.

Considerable disagreement has marked every aspect of the Castle Rock deal, including the size of distribution fees and who would handle overseas and video. Sony has been reportedly hardballing Castle Rock on all those deal points, furthering the tension between the two companies.

Prior to making a deal with Turner, Castle Rock is understood to have gone to Sony with a similar proposal, but Sony declined. One source explained that Sony simply didn’t have the capital on hand toacquire Castle Rock and fully fund several high-end pictures a year.

But since its distribution deal with Sony has 12 projects to go, Castle Rock has agreed to extend the deal under sharply modified terms. With “In the Line of Fire,” for example, Sony put up all the cash and Castle Rock accepted a relatively modest producer’s fee — even though Castle Rock had developed and packaged the project. Under the revised distribution deal, Sony will be effectively renting its system to Turner-Castle Rock.

Back East, Turner’s task is to convince his board that the acquisitions of New Line and Castle Rock not only make both strategic and economic sense for the long-term well-being of Turner Broadcasting System, but also hold tangible benefits for major shareholders Time Warner and Tele-Communications Inc.

Turner was in a similar position a few years back when he petitioned his board to allow him to buy the ailing Financial News Network. But the board shot him down in that go-round, arguing that the $ 150 million-plus price tag was just too high.

Prospects rosy

But investment bankers close to the movie deals are confident that this time around, Turner will get the thumbs up.

“Generally boards only meet to approve things,” said one Wall Street insider. “The board met to turn down FNN, but having been turned down once, I don’t think Turner would be calling a board meeting to be turned down again.”

From a strategic point of view, most say the potential deals appear sound. “This is critical to the growth and development of Turner Broadcasting,” opined an investment banker involved in the deal. “Over the last several years he has created a very powerful empire that has been built in large measure on the success he has made from the acquisition of the MGM film library. But he’s gone as far as he can with that.

“The one thing that is clear to everyone who follows this industry is that you need a flow of new product to refresh existing libraries and maximize their value. He needs new product to feed his distribution machines.”

Not everyone agrees. Porter Bibb, managing director at Ladenburg, Thalman & Co., whose biography of Turner will be published next month, argues that Turner should be concentrating more on the rapidly growing international arena, where competitors like Rupert Murdoch and the BBC continue to snatch opportunities from under Turner’s nose.

Even so, Bibb admits that Turner seems hellbent on signing these deals. And most now believe some sort of Hollywood deal is an inevitability.

“It’s the only thing that he hasn’t really nailed down,” said a Wall Street source. “He owns the sports franchises, he owns the cartoon libraries, so the only thing he really needs is a flow of movie product.”

Economically, the deals look within Turner’s wherewithal. Financial types originally pegged both acquisitions as pure stock deals: $ 100 million for Castle Rock and another $ 300 million for New Line. But Turner’s stock has risen 15% since news of the negotiations became public. Since stock deals dilute earnings, news of a potential deal usually exerts downward pressure on the acquirer’s stock price, rather than pushing it up.

Above and beyond the acquisition costs, Turner could over time be spending anywhere from $ 700 million to $ 1 billion in production funding for both entities.

This is where the approval of major shareholders Time Warner and TCI really comes into play.

TCI supportive

Sources say 22% stakeholder TCI — in the person of John Malone — has been an active supporter of the deal. That’s in part because Malone will probably want to clone similar arrangements with Castle Rock and New Line product for pay-per-view use to those he has proposed with Carolco Pictures.

Time Warner — long considered the biggest barrier to any deal — also appears on board. Time Warner has made no secret about wanting to “monetize,” or convert into a revenue generator, its 18.6% stake, and this may be the opportunity to put that ball in motion.

Some in the investment community believe TW — rather than face the huge tax burden that would accompany any outright sale of stock — will try to trade its stake for some TBS assets. The current favorites appear to be the Cartoon Network and Hanna-Barbera.

Time Warner has long searched for a basic-cable complement to its pay-cable powerhouse HBO, and the Cartoon Network could fill that void. Hanna-Barbera could also provide a deep well of characters — from the Flintstones to the Jetsons — to help fuel TW’s Six Flags amusement parks and burgeoning retail stores.

While most believe Turner will never part with his “crown jewels”– CNN, CNN Headline News, Superstation TBS and TNT — they could envision a sale of the Cartoon Network and H-B. Such a sale would have the least impact on TBS’ balance sheet, and of all the programming services Turner controls, they appear the least integral to the company’s long-term growth.

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