Time Warner Turner: Ready For Prime Time

Gerald Levin finally gets some good news

For a while, it looked like time might be running out on Gerald M. Levin, CEO of Time Warner Inc. The company's stock has long been lagging, a restructuring announced with much fanfare 18 months ago hasn't materialized, and the company's executive ranks have been in turmoil for a year--especially in its music business and at HBO, its pay-TV service.

Then, a breakthrough--and not a moment too soon for the beleaguered Levin. On July 16, after weeks of negotiations, the staff of the Federal Trade Commission reached a compromise with Time Warner that would let its $6.2 billion merger with Turner Broadcasting System Inc. go forward. The FTC's price: Levin, media mogul Ted Turner, and cable titan John C. Malone of Tele-Communications Inc., had to agree to concessions aimed at preventing their new behemoth from squeezing out competitors in cable systems and programming.

BUYING TIME. While the FTC commissioners still have to formally ratify the settlement soon, the merger is expected to be approved, allowing the deal to close by year's end. That's a relief for Levin. Indeed, completing the Turner deal has for the past year been viewed as the cornerstone of his vision for Time Warner. "If the deal had not gone through, it would have been seen as a failed strategy," says Cowen & Co. analyst Harold L. Vogel.

The FTC went for the settlement because it allays fears that Time Warner, Turner, and cable giant TCI (which owns a 21% stake in Turner) would squash rivals in both cable systems and programming. Together, Time Warner and TCI own nearly half of the nation's cable distribution systems. And Time Warner and Turner account for 40% of the country's revenues from cable programming, according to the FTC.

To resolve these concerns, the settlement puts some distance between TCI and the new company. It calls for TCI to spin off its 9.2% stake in the new company into a separate entity owned by TCI's Liberty Media Corp. Malone and other TCI insiders would be passive investors without voting power or management say. Malone and other TCI officers are even barred from communicating with the management of the new company being formed to hold TCI's Time Warner stock, says a source close to the deal. But analysts figure Malone will still find ways to exert influence.

TCI and Time Warner also will scuttle an agreement that gave TCI a 15% discount over 20 years for popular Time Warner and Turner channels such as Headline News, CNN, and TBS. Now, no such new deals can be struck for six months, there will be no pre-set discounts, and some contract periods cannot exceed five years.

SENSITIVE ISSUE. Lastly, the companies agreed to provisions to prevent discrimination against competing cable programmers and systems. They have agreed not to bundle Time Warner and Turner programs for sale to cable systems, since their popularity might let them raise prices. They have agreed not to discriminate against other cable systems in selling programming. And they will provide other programmers equal access to their systems, including a promise to offer subscribers one of the fledgling cable news channels being launched this year by other media companies to compete with CNN. This is a sensitive issue. In its launch of MSNBC cable, NBC executives have complained that neither TCI nor Time Warner have shown much interest in expanding distribution of the new channel.

Though striking a deal with the FTC is a victory for Levin, there's a twist: It could also mean that he exercises less control over his sprawling conglomerate. With Malone likely to weigh in and with Turner taking an active role at the helm of the company, Levin could find himself gradually edged aside.

That's a plus for some of the company's institutional holders. "[We think] John Malone and Ted Turner would become more active in Time Warner and finally begin to realize some asset value," says John Chadwick, executive vice-president of Bessemer Trust Co., holder of 485,000 Time Warner shares. That would be ironic for Levin: His big win with the FTC may only weaken his position as the leader of the rapidly expanding Time Warner empire.

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