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Anti-Trust and Mergers: Time Warner-Turner Merger Proposal

News

Time Warner Inc.’s $7.5 billion proposed purchase of Turner Broadcasting Systems is facing serious opposition from the Federal Trade Commission (FTC). Top FTC staff members have formally recommended that the commission block the proposed deal, unless the companies agree on measures to resolve antitrust concerns. (WSJ, July 10, 1996)

 Major Concern

The FTC’s major concern is anti-competitiveness in the cable industry. Tele-Communications Inc. (TCI), the Englewood, Colo., cable operator, owns 21% of Turner and would own about 9% of the merged company. Since each stock also has a voting right, TCI’s would be voted by Gerald Levin, chairman of Time Warner. Regulators are concerned that the direct link would reduce TCI and Time Warner's incentives to compete against each other. The concerns are legitimate as TCI is the nation's biggest operator of cable systems and Time Warner is No. 2.

FTC’s Proposal

Anti-trust officials are seeking provisions that would sharply limit TCI's influence over the new company and put enough distance between TCI and Time Warner that the two would effectively remain competitors. "In the view of some at the FTC, such steps would prevent the merged company from using its control of some of the nation's most valuable channels, including Time Warner's Home Box Office and Turner's Cable News Network, to thwart competition from smaller programmers and cable operators," according to the Journal.

 "Among the many complex steps being discussed are: capping TCI's investment in the company, converting the TCI stake to non-voting shares, and altering a provision that would provide TCI a 20-year discount on programming supplied by Time Warner. Under terms of the merger, TCI Chief Executive John Malone would relinquish his Turner board seat and wouldn't be a director of the new company," adds the Journal.

Counter Proposal

Time Warner-Turner, on the other hand, have been trying to persuade FTC officials and staff that the legal case against the merger is shaky and that antitrust concerns could be addressed by "agreements in which the companies would promise not to compete unfairly," according to the Journal.

 You probably guessed right. FTC’s concerns, however, are how to enforce these companies’ "promise," and who and how "unfair" competition is determined. Thus, in effect, under the companies’ proposal, the FTC has to constantly monitor their behavior, which it obviously wants to avoid as it becomes impossible to closely monitor every merger deal. Thus, by taking early precautions, the FTC bypasses the monitoring problem.

Follow Up: Time Warner-Turner Deal Approved by FTC

News

Federal anti-trust regulators have agreed to approve the $7.5 billion merger between Time Warner Inc. and Turner Broadcasting System Inc. according to CNNfn (July 17).

 FTC’s major concern was anti-competitiveness in cable TV programming and distribution. The hurdle was the role of Tele-Communications Inc. (TCI) role in the new company. Objections to the merger were apparently overcome after the companies agreed to three amendments that limit the role of major shareholder TCI in the merged company and pledge that Time Warner will act in a non-discriminatory way toward rival cable operators and programmers.

 Under the agreement, TCI Chairman John Malone will cap his interest in the merged company at 9.2 percent, spin off the TCI shares to the company's Liberty Media subsidiary and turn over voting control of his company's shares to Time Warner. In addition Time-Warner must also agree in writing that it will not discriminate against its competitors, and is required to offer at least half of its cable subscribers an independent all-news channel to compete with CNN. Furthermore, TCI's 20-year deal to carry Time-Warner-Turner programming at a 15% discount has been canceled. Now new contracts with a maximum length of five years must be renegotiated six months after the merger is consummated.

Market Reaction

Wall Street reacted positively to all parties concerned in the deal. Time Warner closed at $36.625, up $3.375, or 10%, in composite trading on the New York Stock Exchange. Turner's Class B shares closed at $26.75, up $2.75, or 12%, in American Stock Exchange composite trading. Even shares of Liberty Media, the TCI subsidiary that controls TCI's 21% stake in Turner, advanced $1.625, or 7.5%, to $23.375 on the Nasdaq Stock Market.

What Is the Next Step?

Despite the market’s favorable reaction, management of the new company has to start creating shareholder value. The company’s stock has languished in the midst of an unprecedented bull market.

 On the financial side, it needs to reduce what will amount to be $1.7 billion in debt. With regard to ownership, the disagreements with minority investor U.S. West Inc. (See related story) needs to be settled. Moreover, other businesses, currently part of the Turner portfolio, also need to be reconsidered. The portfolio includes sports teams, including the Atlanta Braves baseball club and the Hawks basketball franchise, and New Line, the studio behind "The Mask" and "Dumb and Dumber." Furthermore, there is the nagging question of how long Turner himself will be content to have Levin at the helm.

By Alex Tajirian