BUSINESS, Page 54Return to SenderTime Inc. rejects Paramount's takeover bid and moves to cementits Warner merger with an offer that could ultimately cost $14billionBy John Greenwald
Steven Ross, 61, had been up late into the night helping to
reassemble the pieces of the biggest deal of his life, but he was
feeling particularly ebullient at noon the next day. As he met with
reporters last Friday, the chairman of Warner Communications
playfully handed out black-and-yellow Batman lapel pins, a
promotional item for his studio's big summer film. Shunning a
chair, the executive casually plopped himself down on the floor and
began extolling the deal he hoped to see through. Said he: "There
could not be a better fit in the world."
Ross was speaking of Time Inc. and Warner, whose planned merger
has come to resemble a three-dimensional chess game, with the
winner destined to become king of the global media board. Rumors
and speculation ran wild, and stock prices gyrated, as directors
of Time met last Thursday and early Friday to consider the hostile
$10.7 billion takeover offer that Paramount Communications had put
forward the previous week. After deliberating for ten hours on the
34th floor of the Time & Life Building in Manhattan, the board
approved a double-barreled response that demonstrated Time's
determination to complete its merger with Warner. Declaring that
Paramount's $175-a-share bid was "not in the best interests of
Time, its stockholders and its other constituencies," the board,
which consists of four Time executives and eight outside directors,
unanimously rejected the proposal. Said Time President N.J.
Nicholas: "The $175-a-share offer does not come close to the true
value of this company."
To proceed with the merger in the face of the Paramount attack,
Time abandoned its earlier plan for a debt-free, tax-free stock
swap with Warner, and instead launched a $70-a-share tender offer
for 100 million of Warner's nearly 200 million shares. That would
buy Time a controlling interest in its merger partner; the
remaining Warner stock will be acquired later in exchange for cash
and securities. The deal will cost Time the kind of debt it and
Warner had hoped to avoid -- somewhere between $7 billion and $14
billion. Unlike the original Time-Warner arrangement, the initial
acquisition will not need the approval of Time shareholders because
the first part of the transaction will involve only cash.
Time took other steps as well. The company swapped some 7
million of its shares for 17.3 million Warner shares, or about 10%
in each company. The exchange could have the effect of frustrating
Paramount by placing a large block of Time stock in friendly hands,
and it gives Time a head start in its acquisition of Warner shares.
Time also asked a federal court in New York City to halt the
Paramount bid on the grounds that it reflected a "campaign of
deception and manipulation" to derail the Time-Warner merger. The
suit alleged that Paramount feared the competitive impact of a
Time-Warner combination and was intent on keeping such a merger
from taking place. Said Nicholas: "I'm convinced that Paramount's
was a spoiler bid."
Paramount attacked the revised Time-Warner merger agreement as
"a defensive device, pure and simple. From the standpoint of Time
shareholders," the company said, "we don't see how it begins to
compare with our offer of $175 a share in cash for all shares."
Declared Paramount's principal investment banker, Robert Greenhill
of Morgan Stanley: "We consider this a very weak response."
Paramount repeated an earlier offer to negotiate a higher price,
and declared, "We will continue our efforts to acquire Time Inc.
with firm determination."
On Wall Street investors took a cautious first look at the
proposed Time-Warner cash bid. Time stock, which had closed at 180
on Tuesday on rumors that major new bidders might enter the fray,
fell to 162 1/2 a share on Friday. Warner stock rose to 59 1/4, up
3 1/8 for the week, and Paramount, which was also the subject of
takeover rumors, closed at 58 1/8, down 1. Many takeover
speculators, some of whom own stock in all three companies, seemed
perplexed at the growing complexity and unpredictability of the
triangular struggle.
Critics of the deal complained that it would not quickly raise
Time's stock to the level of Paramount's bid. "Time management had
a plan to build an empire, and somebody threw a wrench into that
plan by offering the shareholders a better price," said Ralph
Whitworth, director of the United Shareholders Association, a
Washington-based advocacy group. "It should have been left up to
the shareholders to decide" how to vote on Paramount's proposal.
Disappointed Time stockholders may be inclined to bring lawsuits
accusing the company of failing to look after their immediate
interests. Said a top Time executive: "Of course, there will be a
lot of shareholder suits. But there will be a lot whatever we do."
Many Wall Street analysts believed Time's new play for Warner could
attract additional bidders for both companies, which helped explain
why Time's stock price remained relatively high despite the board's
rejection of the Paramount bid.
Some investors nonetheless expressed outspoken support for the
deal. Said Gordon Crawford, a money manager at the Los
Angeles-based Capital Group, the largest institutional owner of
Time shares: "If you put Time and Warner together, you have what
I think will be the greatest media and entertainment company in the
world. I would rather be a long-term owner than cashed out of one
of the world's most exciting companies at $175 a share." Concurred
Kendrick Noble, who follows media companies for the Paine Webber
investment firm: "After all the smoke blows away and we can look
at the facts, Time's shareholders should gain from this. The new
company will produce higher income over the longer term."
The latest agreement replaced a March merger proposal that
called for Time to acquire Warner in a swap of 0.465 shares of Time
stock for each Warner share. But some on Wall Street had complained
that the deal gave Time shareholders no immediate financial reward.
"The marketplace has told us we can do better," said Time's
Nicholas, 49. "We're still acquiring Warner, but now we're using
cash." Nicholas acknowledged that the combined company's earnings
would suffer in the short run, but he argued that the company's
value will be evident to anyone who examines its assets. Under the
earlier arrangement, the new company would have combined assets of
$10 billion spread over 140 million shares. The revised agreement
could spread that underlying value over about half as many shares.
The Time-Warner combination would take on a heavy load of new
debt, as much as $14 billion. The company (estimated total
revenues: $10 billion) would have an estimated cash flow of $2
billion, which would be tapped for loan payments. "These are great
organizations with very good cash flows, so the debt doesn't have
to be a negative," observes William Farley, chairman of
Chicago-based Farley Industries, which took over West
Point-Pepperell in a hostile bid this year. But, he adds, "it takes
a certain kind of management to deal with that kind of debt. You're
that much closer to the edge. You can't afford to make all that
many mistakes."
In rejecting Paramount's bid and going its own way, Time
contends that the $175-a-share offer was never really credible.
Nicholas noted that it was contingent on "substantial conditions"
that included Paramount's ability to obtain financing and the
approval of regulatory agencies.
One of Paramount's biggest potential obstacles is the task of
persuading the Federal Communications Commission and some 750 local
governments around the country to transfer to Paramount the
licenses and franchise rights for cable-TV units operated by Time's
82%-owned American Television and Communications. Getting approval
for such transfers "would be difficult even without a hostile bid,"
says Ross, "but now we'll be challenging them every inch of the
way." As the three-way takeover battle wears on, it is likely to
be fought in just that contentious manner -- in the courts, the
stock market and the corporate trenches.
-- Frederick Ungeheuer/New York, with other bureaus
