News: Analysis & Commentary: DEALS
THE BABY BELL IN JERRY LEVIN'S SOUP
Gerald M. Levin is on a tear. In September, Time Warner Inc.'s chairman announced the $7.5 billion acquisition of Turner Broadcasting System Inc. Then, in mid-November as part of a big restructuring, he folded Time Warner's chaotic music business together with its powerful movie studio. Along the way he ousted Michael J. Fuchs, the longtime chairman of Home Box Office Inc. and briefly the head of Warner Music Group Inc. Finally, on Nov. 20, word spread that Levin would like AT&T to invest billions in his sprawling cable-TV systems.
All of which says that Levin finally is putting his imprint on the company he took charge of three years ago. His vision: a global media colossus with three main operations consisting of entertainment, news, and telecommunications. Eventually, entertainment would include the company's studios, a slew of cable channels to display their productions, and a collection of record labels. Telecom would offer cable TV, phone service, and Internet access over broadband cable. News would feature CNN, CNN spin-offs, and an array of magazines. Divisions would cooperate. Wall Street would be happy. The stock would go up.
UNHAPPY INVESTORS. But there is a problem: U S West Inc. Not counting the government, which promises to spend the next six months picking at the Turner deal with a magnifying glass and tweezers, U S West clearly is Levin's biggest headache. By virtue of a $2.5 billion investment in 1993, the regional phone company owns 25.5% of Time Warner Entertainment (TWE), which holds the company's movie studio, HBO, and most of its cable systems. Time Warner Inc. (TWX), meanwhile, owns music, magazines, and a little cable. Levin last February promised Wall Street he would simplify the structure. Since then, though, U S West has refused to go along.
That hasn't made investors happy. The street's biggest beef with Time Warner is its huge dependence on the capital-intensive, government-regulated cable business. Levin's solution is to shelter Time Warner's "content assets" from its cable properties by moving the studio and HBO from TWE to TWX. Then Turner would be folded into TWX. Finally, he could put all the cable assets in a discrete self-financing entity.
Such a reorganization would allow Levin to push his cable business into the expensive new worlds of telephone service and high-speed data transfer without roiling investors. Talks between Levin and AT&T have never really heated up. It's not even clear Justice would let AT&T invest in a partnership with a Baby Bell. But as a partner, AT&T could help in several ways. First, as Time Warner branches into phone service, it could use a powerful brand name like AT&T's. It could also use money for fiber upgrades and debt reduction. AT&T, for its part, wants to bypass local telephone monopolies and enter the market for local calling via cable systems.
That's all fine, but look at it from U S West's perspective. The Baby Bell's TWE investment has nearly doubled in value during the past two years, largely on the strength of the studio and HBO. So why trade out of those stakes? Moreover, U S West considers AT&T a potential competitor in its local telephone markets, located in the Mountain States. If it is going to participate in a joint venture with AT&T in the East, analysts say, it wants to extract concessions from AT&T in the West. U S West denies it has this motive.
If all this sounds complicated, it is. But it all comes down to a game of leverage. That's why U S West turned up the heat by suing Time Warner to block Levin's cherished Turner deal. The Baby Bell contends that by purchasing the Turner entertainment assets, TWX would be competing with TWE, possibly to the detriment of U S West. Time Warner countersued, saying that U S West has blocked TWE from cutting a deal with AT&T. Court dates are scheuled for March.
U S West was causing headaches for Levin even before the Turner deal surfaced. Last spring, faced with Levin's plans to move HBO and the movie studio from TWE to TWX, the Baby Bell demanded 51% ownership of all the cable systems. Time Warner's offers included a 50-50 joint venture in which Time Warner executives would manage the cable business and U S West executives would manage the telephone business. That would last until a manager could be groomed with expertise in both businesses. If the venture were to take on a minority partner such as AT&T, the ownership of both Time Warner and U S West would be diluted in equal portions.
The two sides came close. Then the Turner deal cropped up. Now, Time Warner wants to reach some kind of settlement with its cranky partner before proceeding with Turner or more talks with AT&T. "I expect there will still be a restructuring where we're involved with each other," says a top Time executive. Given U S West's blocking power, it won't come cheap.
CAN'T THEY ALL JUST GET ALONG?
Participants in the corporate dance around Time Warner's cable unit
It needs partners for three reasons: To provide technical expertise, to supply a brand name and marketing clout, and to provide capital for broadband upgrades. AT&T would bring all three.
Ma Bell wants to offer a package of local, long-distance, and cable services. A stake in Time Warner cable would clear the path.
U S WEST
With its 25% stake in Time Warner, it can offer cable services as a defense against cable companies gearing up to enter the local phone market. Could it deal with potential rival AT&T as a partner?By Michael Oneal, with Catherine Arnst in New York and Peter Burrows in San Francisco