Time Warner Turner: Nice Script, But...David Greising
The entertainment biz is nothing if not flexible. Not so long ago, Walt Disney Co. Chairman Michael D. Eisner was pooh-poohing big-ticket acquisitions. Time Warner Inc. Chairman Gerald M. Levin, desperate to pare debt from his balance sheet, wanted out of his 18% stake in Turner Broadcasting System Inc. And Ted Turner was adamant in his refusal to do any deal that left him second fiddle.
The talk sounded good at the time. But now Eisner is paying $19 billion to buy into Capital Cities/ABC. And in the wake of that megadeal, Levin and Turner are working to fashion another: Levin has offered a dazzling $8 billion-plus to buy TBS, and Turner is said to be enthusiastic. Their talks are setting the stage for a merger that would catapult Time Warner past Disney to regain its title of world's largest media company.
PAYING DEARLY. Make no mistake: This deal, if it comes off, is all about scale. The cash and technology needed to beam movies, TV, and information to the world's billions are demanding that entertainment companies become, simply, bigger. Turner seems willing to subsume his imposing ego to the reality of an industry increasingly dominated by giants. Although he runs several thriving global businesses, one associate says, Turner feared being "closed out of the loop."
Levin, likewise, clearly sees the value of bulk. A deal with TBS would create a media conglomerate of unique depth and breadth in movie libraries, studios, cable properties, and publishing. Time Warner would gain international reach and expertise, features its cable and movie businesses plainly lack. And it would net Turner's singular talent for turning old copyrights into new revenue opportunities.
That's why Levin appears willing to pay so dearly. By offering the stock equivalent of $35 a share, he would put up a staggering 17 times TBS's projected 1995 cash flow, well above the 12 times Disney paid for ABC. Besides diluting Time Warner shares by 50%, the deal would do nothing to reduce the company's $15 billion debt burden that has spooked Wall Street. "This is such a dilutive transaction that, in order for shareholders to win, there has to be a tremendous earnings increase," says a source close to Turner.
IN THE WINGS. Clearly, this is no done deal. John C. Malone, whose Tele-Communications Inc. owns 21% of TBS, still could block the purchase any time. The TCI chairman won't buy into a deal, industry sources say, unless Levin can make it worth his while. He already has turned down cash for his stock, fearing the resulting tax bill, and may instead demand a sweetheart price for HBO Inc. and the Turner networks on TCI's cable systems. Even if he wins such concessions, industry executives who watched Malone jump ship in Barry Diller's push to acquire Paramount Communications Inc. say Levin can't rely on Malone's support until the ink is dry.
Then there are other potential bidders in the wings. General Electric Co., which has made no secret of its desire to fuse Turner with NBC Inc., could emerge with a fresh bid. And knowledgeable industry executives say Rupert Murdoch's News Corp. or even Disney might make a run for TBS. A Disney source says executives in Mouseland are crunching the numbers.
It's a good time for Turner to find the partner he so needs. His business is going gangbusters and should bring cash flow of $600 million this year, up 50%, figures Merrill Lynch & Co. analyst Jessica Reif. The CNN news network, TNT movie channel, and Cartoon Network are reaching 4% more households this year than last--and charging 20% more for ads. Movie operations, anchored by recent additions New Line Cinema Corp. and Castle Rock Entertainment, will crank out 50 films a year by 1997.
Levin isn't talking, but his rich proposal speaks volumes about how much he values such assets. Certainly, the match makes eminent sense for him. Time Warner has lofty international ambitions, and CNN, for one, offers a strong vehicle for its entry into foreign markets. "We're trying to do some things internationally, but we're trailing them," says one Warner executive.
Just as important, Turner is a master at spinning libraries of content into cable channels. That's what made TNT and the Cartoon Network successful. Time Warner owns HBO, a strong movie channel, but has fallen behind in developing complementary new networks. Moreover, the two companies' varied operations would fit together nicely: A merger could put Warner Brothers cartoons on the Cartoon Network and combine the Warner studio libraries with Turner's. And Warner, Castle Rock, and New Line together would own 22% of box-office market share. "We're in businesses that don't compete with each other," says a Turner executive. "The point is, you wouldn't have to eliminate very much at either company."
STILL FEUDING. There are nonbusiness factors, too. The move helps Levin answer investors who claim he has lacked innovation and leadership. It would make Time Warner, with $18.2 billion in sales and a market capitalization of about $23 billion, virtually unassailable as a takeover target, even given today's break-the-bank merger mania. And it would dilute the power of large shareholders--Seagram Co., for example--that have sometimes disputed Levin's strategy.
It looks promising, certainly. But Levin would have to show that Time Warner can make it work. After all, HBO and the Warner cable operations are still feuding years after they were joined via merger. Some of Turner and Time Warner's businesses don't have obvious fits. And there are no obvious ways to cut costs, as Turner could have done by bringing together CNN with news operations at the CBS network he coveted.
The most intriguing part of the deal may be how the Turner-Levin combo plays out. Less than a year ago, Turner told a National Press Club audience that Levin was "clitorizing" him by using a Time Warner veto on the TBS board to stop him from buying a network. Now, Turner--who hasn't worked for anyone since taking over the family business at age 24--is supposed to answer to Levin. Scale is important, but ego may yet win out.
Who Gets What With Turner
The players negotiating a combination of Time Warner and Turner Broadcasting
GERALD LEVIN, TIME WARNER
A Turner deal would put him atop the industry heap--not bad for the old ego. More important, Turner's CNN, Cartoon Network, and TNT would provide valuable programming for Time Warner's cable systems. And TBS's international presence would boost his push overseas.
TED TURNER, TBS
Unable to buy a network, he would finally succumb to consolidation in the media business. Not great for the ego. But he would control 10% of Time Warner voting shares, get two seats on the board, and still run TBS. The question: Can Ted work for anyone?
JOHN C. MALONE
Still a wild card, despite apparent early support for deal. Converting Turner shares to an 8% Time-Warner stake presents a possible anti-trust issue. And TCI's movie and sports channels could lose, as Time Warner gets first dibs to Turner programming. The ego satisfaction isn't sure.