If Time Warner can pull off its $8 billion-plus proposal to buy Turner Broadcasting System, the corporate infighting that has been standard operating procedure at the media giant may end up looking tame in comparison to what’s to come.
Indeed, the difficulties that Time Warner chairman Gerald Levin is having negotiating the deal with Turner shareholder Tele-Communications Inc. CEO John Malone and TBS chairman Ted Turner is a sign-post of the problems that will engulf the combined enterprise if the acquisition is finalized.
Time Warner and TBS confirmed Aug. 30 that they were “in discussions to merge their companies” in a stock-swap deal in which Time Warner would offer 0.75 shares for each Turner share. The companies warned that “significant issues remain to be negotiated.”
Those issues include concessions demanded by TCI for its agreement to the deal, including long-term commitments for TCI’s cable networks to be carried on Time Warner’s cable systems, and Levin’s insistence on a voting trust agreement to” somehow limit TCI’s and Turner’s ability to work together against him in certain situations. TBS and Time Warner also have management issues to sort out- mainly, who would report to whom- although it is not clear whether those issues are potential deal-breakers.
A “rough outline” of an agreement was reached by the weekend, but the deal was still subject to a final accord being drawn up by lawyers working through the Labor Day holiday and must be accepted by the principals later this week. An announcement on a deal is not expected before Sept. 6 at the earliest, sources close to Time Warner said Sept. 1.
Malone’s mind games
Malone’s propensity to change his mind at the last minute means the deal could be derailed at any time. But if the acquisition is consummated, Levin’s problems may only be starting.
He will have to oversee a melding of two of the most diverse corporate cultures- the lavish Time Warner layered over the tight-fisted TBS. As CNN star anchor Bernard Shaw once said, “Ted Turner could squeeze Lincoln off a penny.”
Just as daunting will be the challenge of bringing two star power players, Malone and Turner, into a Time Warner already dominated by strong personalities of Warner Bros, co-chairmen Bob Daly and Terry Semel and HBO and Warner Music Group chairman Michael Fuchs, all of whom enjoy running their respective fiefdoms with little interference from above.
Levin will need the skill of a media Marshall Tito to keep the resulting mix of corporate chieftains from turning Time Warner into a map of war-torn Bosnia.
The irony of the situation has not been lost on the Turner camp. “This is not the usual way you do a deal. Normally the company that is out of control is taken over by the group that is in control. This is unique. We are in control, going into a company of less control,” says a Turner exec familiar with the negotiations.
What Levin needs
Whatever the dangers, Levin needs the deal to speed the growth of his empire. While virtually all of Time Warner’s divisions are market leaders, most are mature businesses, whereas most of Turner’s holdings are on the rapid growth curve of cable networks. For that reason alone, Wall Street cheered the deal.
And, of course, Levin is a seasoned veteran at dealing with the collection of dueling egos trying to hammer out the deal; most of the players are already directors of Turner Broadcasting. And while managing the relationships on the bigger stage of Time Warner will be tough, the process of negotiating the deal may be the hardest part.
For those who enjoy the sport of brawling brass, a preview of coming attractions of post-merger life broke into the open when Fuchs sent a missive via the Sept. 1 New York Times that he was uneasy about the division of power with Turner in the mix. The HBO boss was obviously trying to derail one idea under discussion that would put a key part of his fiefdom, HBO, in the Turner camp.
While key Levin lieutenants were first led to believe that Turner’s management purview would be limited to Turner Broadcasting properties, it now appears that he could emerge post-merger with a much bigger role.
“Ted is in a power position right now,” says a senior Time Warner exec. “And it will be up to Ted and Jerry (Levin) to figure it out.”
The two will have to sort out the future roles of senior TBS execs such as Terry McGuirk and Scott Sassa as much as how Time Warner execs are affected.
Concerns within TW
The attitude of Time Warner brass varies. While Fuchs’ unhappiness is almost certainly linked to a realization that the deal could kill his chances of succeeding Levin, Daly and Semel are solidly in favor of the deal, no doubt savoring the implications of the upheaval for Fuchs.
While Turner is no more likely to succeed Levin then Fuchs, Turner and his ally Malone will play a major role in the company’s future.
Certainly, that likelihood has not escaped Levin. Indeed, there’s already talk about Turner pulling a Trojan Horse into 75 Rock, the company’s New York headquarters, with Malone inside.
Most observers of the media giant acknowledge that the deal has saved Levin in the short term. But at the same time they believe the mix of shareholders will be more destabilizing for the chairman in the longer term.
If the deal goes through on terms currently understood, Turner would emerge as the biggest shareholder with about 11.4% of the stock while TCI will have about 8.6%, although it could not vote more than 5% without a change in ownership laws. Capital Group, the biggest institutional shareholder in both Time Warner and TBS and a big institutional holder of TCI as well, would have 8.2%. And Seagram, which now has 14.9% of Time Warner, would be diluted to about 10%.
In some circumstances this group could wind up on the same side. Capital Group senior vice president Gordon Crawford is a longtime ally of Malone, and whoever buys out Seagram may also ally with Malone. It’s conceivable that a block of 38% of Time Warner’s stock could be aligned with Malone.
“Malone will end up owning Time Warner, that’s what it amounts to,” said one Wall Street analyst.
People close to Time Warner point out that there would also be a block of supportive shareholders- the two Japanese conglomerates Itochu and Toshiba, owning 1.6% each after the deal, cable entrepreneur Alan Gerry (2.3%), Houston Industries (4%)- while they argue that Turner’s loyalty is not necessarily locked to Malone.
Meanwhile, there’s precedent for the voting trust agreement Levin wants written into the merger deal to limit the ability of Malone and Turner to work together against him. It’s the complex set of rules that govern Time Warner and TCI’s ability to sell off their respective stakes in Turner Broadcasting and give TCI a veto in the current situation.
One wild card to receive little attention so far is the attitude of Seagram CEO Edgar Bronfman Jr., who has refused comment since news of the talks first broke. While Bronfman, whose company recently purchased 80% of MCA Inc., is unlikely to be a long-term holder, he won’t be happy about anything that hurts TWs stock price or dilutes the strategic importance of his investment.
So far, however, the deal has had little impact on Time Warner’s stock, which closed Sept. 1 at $41,375 a share, down 75c, compared with its price of $42,375 on Aug. 29, the day before news of the negotiations broke. While part of the stock’s steadiness is attributed to uncertainty about whether the deal will happen, most analysts say investors also see hugely positive benefits for Time Warner coming out of it despite the high price being paid for TBS.
Time Warner now has “no real engine of growth,” said one investment banker, whereas Turner’s cable networks are growing quickly and are expected to keep growing in the next few years as the cable networks’ penetration of the national audience gets closer to universal coverage.
“It returns Time Warner to the path of becoming a pre-eminent content company. It makes me happy,” says Capital’s Gordon Crawford.
Joe Flint and Anita M. Busch contributed to this report.