Malone, as media buffs know, is president of Tele-Communications Inc., the nation’s biggest cable company. He’s the most powerful person in the cable industry. Thanks to a bailout of Turner that Malone helped lead in 1987, TCI has veto power over the sale of the company and also owns 21 percent of it, second only to Ted Turner’s $1 percent stake. To make Malone happy, Time Warner and Turner have agreed to make ultra valuable side deals with TCI that are worth hundreds of millions of dollars, possibly more than $1 billion. TCI’s Turner holdings would be converted into Time Warner stock worth about $2.1 billion at current prices. So even a mere $400 million valuation on the deals would amount to a whopping 20 percent premium for TCI.
TCI would get so many goodies not available to any other Turner holder that it raises questions whether the deal is unfair to everyone else except Ted Turner, who has got his own side deals. Securities laws require companies to treat all shareholders reasonably equally. Turner, TCI and Time Warner will doubtless marshal zillions of opinions that this deal meets that standard. But just because something may not be illegal doesn’t make it fair. It certainly doesn’t make it right.
No one will say how much TCI’s side deals with Time Warner and Turner are worth. But it doesn’t take higher mathematics to see that it’s a huge number. Take the deal under which Time Warner will almost surely pay TCI $860 million for Southern Satellite, a company that distributes Turner superstation WTBS. Before Turner-Time Warner, analysts valued Southern Satellite at about $150 million. So getting $360 million puts TCI $230 million ahead. Now take the extraordinary deal under which TCI will get 20 years of programming services from Time Warner-Turner at today’s rates with no increases. Be conservative, and say that saves TCI 50 cents a month per subscriber for 16 million subscribers starting in five years and the savings stay constant for 15 years. What’s it worth? In today’s dollars, about $500 million. Time Warner disputes my number but won’t provide a number of its own.
Another yacht?TCI’s side deals are so big that they’re putting the whole deal in jeopardy because other cable companies that own Turner stock may sue unless they get a better deal or Malone gets a worse one. They argue that Malone and Ted Turner cut a deal behind their backs. TCI’s side deals could also become an issue in the suit filed against Time Warner by US West, which owns 25 percent of key Time Warner assets including cable-TV systems, Home Box Of-flee and the Warner studio. US West claims Time Warner can’t buy Turner without its consent; Time Warner says it can.
Turner Broadcasting wouldn’t discuss TCI’s deal. A Time Warner spokesman said Malone was entitled to special consideration because of his veto power. In addition, argued the spokesman, Ed Adler, the 20-year fixed-price programming deal is good for Time Warner because it guarantees that TCI will carry its shows. Southern Satellite, Adler said, will add $100 million a year to Time Warher’s cash flow by letting WTBS become a network. But even if these deals are as good for Time Warner as Adler says, they still amount to giving special consideration to TCI.
Ted Turner makes out OK, too, getting Time Warner stock worth about $2.7 billion at current prices. But unlike other holders, he’ll also get a fat five-year employment-and-stock option package said to be worth more than $100 million. By contrast, Turner got a mere $2.35 million from Turner Broadcasting last year and didn’t get any stock options. Even billionaires can use a little extra cash to help buy the odd goody like another ranch or a yacht.
I’m not even counting Ted Turner’s fringe benefits, such as getting Time Warner to in effect pay $40 million of the reported $50 million he’s giving his buddy, fallen junk-bond king Michael Milken. But Time is an old hand at giving lucrative side deals to people to whom it’s handing control. It did so in 1989, when it paid the late Steve Ross a fortune when Time and Warner combined. Now it’s doing the same with Malone and Turner, who I think will be running the show a year or two after the deal is done. As they say, do unto others before they do unto you.
