Shootout At Time Warner?

Like thousands of others, Gerald M. Levin was rudely jolted awake on the morning of Jan. 17 by the Los Angeles earthquake. Hours later, the chairman of Time Warner Inc. checked out of the Peninsula Hotel and departed for New York on his private jet. Although his Warner Bros. studio lot was badly damaged, Levin had pressing business back East: Three days later, Time Warner's board would vote on an antitakeover plan drawn up by Levin after Seagram Co. boosted its stake in the media giant from 10.4% to 11.7%.

Critics of Levin have seized on this anecdote as evidence of a CEO more concerned with his own job than with the welfare of his troops. Such remarks would qualify as routine Hollywood cattiness if they didn't come from close advisers to Seagram President Edgar Bronfman Jr. Bronfman is masterminding his company's $1.7 billion investment in Time Warner. And he is fuming that Levin passed a poison pill just weeks after telling him that he welcomed the Seagram investment. "It clearly represents a changed attitude on the part of Time Warner," says Bronfman. The upshot: He and Levin are locked in a war of nerves.

HUGE PRICE. Will Seagram launch a takeover of Time Warner? Most observers find such a prospect improbable. For one thing, with its sprawling assets, revenues of $14 billion (table), and $16 billion of debt, the company could cost more than $20 billion. For another, Levin has consolidated his power since he took over from Steven J. Ross in December, 1992, most notably by replacing several Ross loyalists on Time Warner's board with his own appointees.

Still, company insiders and Wall Street bankers believe Bronfman has been planning a "creeping takeover," by which he would accumulate enough shares to take control without paying a premium, much as Laurence A. Tisch did with CBS Inc. in 1986. Levin declines to comment, but other Time Warner executives contend that the poison pill won't fend off a legitimate suitor: "If Seagram wants to come in and buy this company at a premium," says Michael J. Fuchs, chairman of Home Box Office, "nothing is going to stand in their way."

Now, Levin and his colleagues are girding for Seagram's next move. Bronfman is meeting with his advisers in New York on Jan. 28 to plot strategy. He says he is continuing to review the rights plan and won't make any hasty moves. Bronfman hasn't asked for a seat on the board, nor has Levin offered one. But Bronfman clearly is smarting. "Why in God's name would they not offer their biggest shareholder a seat?" asks one adviser.

An even bigger question is whether Seagram will move to oust Levin. Media executives dine out on rumors that Hollywood superagent Michael Ovitz will someday run Time Warner. Ovitz, a good friend of Bronfman's, helped steer Seagram toward its Time Warner investment. But Bronfman maintains he has no problem with Levin: "All we've done is to express confidence in Time Warner management," he says.

What does rankle Bronfman and his surrogates, though, is Levin's style. "If Steve Ross were alive," says one adviser, "he would have hugged Edgar Bronfman like a brother." Instead, they say, Levin sprang the poison pill after appearing to accept Bronfman's pledges that Seagram would buy only 15% of Time Warner stock. The plan now caps Seagram's--and any other investor's--stake at 15%. Time Warner's executives ask why Levin should have called Bronfman to give him early warning on the poison pill when Seagram didn't provide Time Warner with advance information on its plan to buy stock.

To some extent, Levin is caught between the clashing cultures of New York and Hollywood. In addition to Ovitz, Bronfman Jr.'s key advisers are his father, Seagram Chairman Edgar M. Bronfman, and entertainment banker Herbert A. Allen Jr. Between them, Ovitz and Allen have brokered the sales of several big studios. Allen is advising Barry Diller on his bid for Paramount Communications Inc., and Bronfman himself once produced films. Levin, by contrast, spent his career in the New York headquarters of Time Inc.

Unlike Ross, Levin doesn't assiduously court movie stars or agents such as Ovitz. Time Warner executives say he doesn't need to: "That's what he has Terry and me for," says Warner Bros. Chairman Robert A. Daly, referring to studio President Terry S. Semel. "I think our results say something about whether that's been a good decision."

HOT MOVIES. Indeed, Warner captured the box-office crown in 1993 for the third straight year, with hits such as The Fugitive. This year's slate looks equally promising, with two strong westerns, Wyatt Earp and Maverick.

Hot movies aren't the only arrow in Levin's quiver. In addition to shrinking the board and replacing members, the soft-spoken CEO enjoys the support of longtime directors such as Henry Luce III. Luce says Levin has mastered Time Warner's far-flung operations: "He's all over the damn place."

Certainly, Levin has convinced Wall Street that Time Warner is on the move. Despite a recent retreat because of the impact of cable reregulation, the company's stock has risen 32%, to 38 1/2, since Levin took over. He has also improved Time Warner's balance sheet by swapping preferred equity for cheaper long-term debt. Levin raised $2.5 billion from US West Inc. by selling the Baby Bell a 25% stake in its entertainment properties. Bronfman's advisers snipe that Levin should have extracted more from US West. But the phone company is helping Time Warner build the first fully interactive cable network in Orlando. The company also is starting a fifth broadcast network.

On the negative side, some media executives say Levin still hasn't fully resolved a simmering feud between HBO and Warner Bros. Although Fuchs and Daly insist their relations have improved, outsiders still question whether Levin commands his headstrong division chiefs as well as Ross did.

Cable TV is another weakness. Government rate regulations are taking a bite out of Time Warner's cable cash flow. As a result, Drew Marcus, an analyst at Alex. Brown & Sons Inc., has reduced his 1994 forecast for Time Warner from earnings of $80 million to a loss of $112 million on sales of $14.9 billion. Mario Gabelli, a money manager who is one of Time Warner's top shareholders, thinks the hiccup in cable profits helps explain why Levin felt compelled to corral Seagram now. With a depressed stock price, Seagram could have boosted its stake on the cheap.

If Time Warner were put in play, Gabelli and other shareholders would prefer a full-fledged takeover battle to a Tisch-style, slow-motion siege. But one executive close to Bronfman disagrees that even such a creeping takeover would hurt Time Warner investors: "Shareholders of CBS have done considerably better under Mr. Tisch than Time Inc. shareholders have done under their management."

Given those sentiments, Levin probably felt he had little choice but to throw barriers around his company. Not so clear is whether Time Warner's poison pill will thwart Bronfman if he chooses to mount a campaign against it. Time Warner does have the support of institutional shareholders, such as the giant California pension fund, CalPERS. Levin's plan is only slightly different from one recommended by Cal-PERS to several other major companies. But a Delaware Chancery Court recently threw out a poison pill used by Paramount to fend off a hostile takeover bid by Diller's QVC Network Inc.

As for money, Seagram also owns a 24.3% stake in DuPont Co., which is worth $9 billion. The company says its relationship with DuPont has been amicable. But executives familiar with DuPont say the Bronfmans have been aggressive shareholders, demanding board seats in proportion to their holdings. For Jerry Levin, High Noon may come a lot sooner than he expects.

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