February 28, 1996

Is Us West Deal a Bold Gamble or Tit-For-Tat?


Is turnabout fair play?

Last fall, Time Warner Inc. surprised its cable television partner, US West Inc., by agreeing to acquire one of the top cable programmers, Turner Broadcasting System. US West, the Denver-based regional Bell company, was so stunned and angry that it hauled Time Warner into court, arguing that it should have had a vote in the Turner deal.

But now, as that case is about to go to trial, US West has turned the table by springing its own surprise acquisition: the $5.3 billion purchase of Continental Cablevision, the nation's third-largest cable operator.

Gerald Levin, chairman of Time Warner, had not been briefed on the plan until he was called to the phone at a benefit in Los Angeles on Monday night, and was given a heads-up by Pearre Williams, US West's chief negotiator in the Continental deal.

The fact that Levin learned the details of the buyout only hours before the rest of the world -- and weeks after talks heated up between US West and Continental -- indicates just how badly the frayed the relationship has become between Time Warner and US West.

Time Warner executives concede that US West had said as early as last May that it might be interested in making a bid for Continental and that Time Warner supported such a deal. But several media analysts said Tuesday that the deal put Time Warner further on the defensive in its legal negotiations with US West.

US West "now has more leverage, because they have more assets to negotiate with," said Paul Kagan, a leading cable industry analyst.

Since 1993, US West has owned a 25 percent stake in Time Warner Entertainment, which operates the Warner Brothers movie studio, the Home Box Office cable service and the nation's second-largest group of cable systems, with a total of 11.5 million subscribers. Only Tele-Communications Inc., with roughly 15 million subscribers, is a larger cable operator.

But the Time Warner-US West partnership has been a rocky one, and it became openly hostile last September after Time Warner told US West that it was buying Turner -- only one day before announcing the deal to the news media.

What US West reportedly wants, in exchange for letting the Turner deal go through, is more control of Time Warner Entertainment's cable subscribers. According to some analysts, Time Warner, which wants to regain complete ownership of Warner Brothers and HBO, might be willing to give US West a larger stake in the cable systems than its current 25 percent, but Levin reportedly does not want to give up control by letting US West have 51 percent or more of the operation.

With neither Time Warner nor US West willing to comment publicly on the status of their partnership, it was difficult to predict what would happen next. Still, several people close to the partnership said Tuesday that, if anything, US West's deal for Continental strengthened its hand in its negotiations with Time Warner.

"It would lead me to believe US West would push for complete management control over Time Warner Entertainment's cable subscribers or to split up the assets and take over the cable businesses," one executive close to the discussions said.

Time Warner, meanwhile, might see some benefit in ridding itself of a restive partner -- and unloading a big piece of its $17.5 billion debt -- by letting US West have the capital-intensive cable systems.

Another motivation for US West to seek control of the Time Warner cable properties is the addition of Amos Hostetter Jr., the chairman and chief executive of Continental, who plans to continue running the company for its new owner. In Hostetter, US West is getting one of the most highly regarded cable administrators in the industry.

Besides having different goals, Time Warner and US West have different negotiating styles, several people close to the discussions said.

Several weeks ago, hoping to resolve their dispute, Levin flew to Denver for a face-to-face meeting with the chairman of US West, Richard McCormick. Direct discussions are the preferred style for Levin, who personally negotiated the Turner acquisition last year with Ted Turner, the company's chairman.

But McCormick prefers to deal through intermediaries, people close to the discussions say, which is apparently why he had Williams phone Levin from Denver on Monday night, then fly to Los Angeles to sit down with the Time Warner chairman Tuesday morning. That difference in style has not helped the tensions between the partners, these people say.

Executives close to Time Warner put a good face on the Continental deal Tuesday. "It endorses the rising value of cable systems," said one executive, who requested anonymity.

Still, most investors in cable stocks did not appear to respond to Tuesday's deal. For example, shares of a comparable company, Cablevision Systems, which has 2.7 million subscribers and is closely controlled by the family of its chairman, Charles F. Dolan, fell 12.5 cents Tuesday, to $56.875, on the American Stock Exchange. And shares of Tele-Communications Inc. and Comcast Corp. barely reacted to the news.

Shares of Time Warner, meanwhile, fell 37.5 cents, to $42.75, also on the American Stock Exchange.

Even if Time Warner and US West decide to settle their differences and patch up their cable partnership, several industry executives noted Tuesday that the companies might then face trouble on the antitrust front.

With the addition of Continental to US West's cable holdings, Time Warner would have direct and indirect control of more than 16 million subscribers. The Federal Trade Commission is already concerned about the Time Warner-Turner deal, because the cable giant Tele-Communications is a major shareholder in Turner.

Gene Kimmelman, co-director of Consumers Union, a consumer lobbying group in Washington, said Tuesday that these interlocking ownership stakes could impede competition and that the FTC should take a look at the US West-Continental merger, too.

"This deal ought to be reviewed in conjunction with Time Warner's deal for Turner," Kimmelman said.

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