Time Warner -- Turner Talks : NEWS ANALYSIS : Benefits of Merger Outweigh Risks

There are two conclusions that can be drawn from the $8.5-billion merger being discussed by Turner Broadcasting System Inc. and one of its biggest shareholders, Time Warner Inc.:

Ted Turner, after weeks of maneuvering in vain to make a run for CBS Inc., now considers himself a seller rather than a buyer--and has put his Atlanta-based cable company into takeover play.

And Gerald Levin, the besieged chairman of Time Warner, will emerge as a winner even if a rival suitor such as NBC’s owner, General Electric Co., walks off with Turner and its collection of prized assets, which include Cable News Network, the TBS Superstation, the Cartoon Network, and film studios such as New Line Cinema.

“This is Levin’s first sign of brilliance and boldness,” said Mario Gabelli, a critic of Time Warner and an investor in both companies through the Gabelli Fund. “There is a 70% probability that he will own it and a 30% chance that he will end up monetizing his stake in Turner at the highest price possible.”

Levin, whose company already owns nearly 20% of Turner Broadcasting, is said to have proposed a tax-free stock swap at Turner’s ranch in Montana on Aug. 19. Turner Broadcasting’s board of directors held a special meeting after the market closed on Wednesday to discuss the offer and could make a decision as early as this week.

But a deal between the companies is far from certain, as indicated by Wall Street’s reaction on Wednesday to the news.

Analysts praised the strategic and economic reasons for the move because it would help both companies better compete in a consolidated entertainment industry, leapfrogging the merged company over the new and improved Walt Disney Co., which was about to steal Time Warner’s mantle as the world’s largest media company by buying Capital Cities/ABC Inc.

What’s more, it could buy more time for Levin, who has been fending off restive shareholders angered by a stagnant stock price, a staggering debt load, a questionable cable strategy and continual management eruptions in the music division, the company’s most profitable business.

The addition of Turner’s cash flow, cadre of programming assets and global positioning could reduce the pressure on Levin to shed assets quickly to pay down debt and give him leverage to spin off cable assets, as promised, to lift the stock price.

Still, while Wall Street initially rewarded Disney for striking a deal with Capital Cities by trading up the stock, investors sold off Time Warner shares, which traded down 87.5 cents a share, closing at $41.375.

On Wall Street, there was a stronger conviction that Turner would be bought: Class A shares soared $6.875 to a record of $30.50, although they fell short of the $35 a share purchase price Time Warner is believed to have offered.

“There’s a lot of skittishness because there are so many unanswered questions,” said one trader. “This is being driven as much by personalities, who could change their minds on a whim, as by economic forces.”

The biggest wild card, perhaps, is Turner’s largest shareholder, John Malone, the enigmatic chief executive of Tele-Communications Inc., the nation’s biggest cable systems operator. Tele-Communications and Time Warner each own about a fifth of Turner Broadcasting and have the right to veto any transaction worth more than $2 billion that the company undertakes. While Malone has been interested in expanding his programming portfolio-- he also owns interests in the home shopping networks-- it is unclear whether he would give up his leverage in Turner for a diluted interest in Time Warner.

“The pivotal player in all this is Malone,” said one television executive. “If Malone is on board, this will go through, but you just never know what Malone is thinking.”

Another uncertainty is whether a network owner like G.E. or News Corp., which owns the Fox Broadcasting Co., might intercede with an offer. Rupert Murdoch, the wily chairman of News Corp., has had his eye on Turner Broadcasting, lusting after an animation library and studio that could buttress its Fox Children’s Network, and a news operation to make Fox an authentic fourth network.

A spokesman for the company said Wednesday, “News Corp. has no interest in Turner Broadcasting.”

G.E., however, reaffirmed on Wednesday its continued interest in owning Turner Broadcasting, which it was close to buying as recently as four months ago, though Ted Turner ultimately refused to give up control. Some executives at NBC even suggested that the cash-rich industrial giant might make a run for the newly merged entity, pointing out that late last year G.E. had considered buying 49% of Time Warner, hoping to gain access to the entertainment company’s magazines, movie studios and cable programming to feed its developing on-line business, television network and CNBC cable channel.

Still, there is a strong sentiment that both Levin and Turner have had changes of heart about their strategies and that both see the mutual benefits of joining camps. Under the proposed merger, Turner Broadcasting would be a wholly owned subsidiary and probably would continue to be run by Turner, who would become vice chairman of Time Warner.

“For Ted, this is the price of freedom,” said one executive close to Turner. “It’s buy or be bought, and at Time Warner he’s more likely to be able to control his own destiny. Working for Levin is more acceptable for Ted than working for G.E. or Rupert Murdoch, his archenemy.”

Indeed, the interlocking relations between Turner and Time Warner have lately hampered each company’s ability to capitalize on the media merger frenzy. Turner has been trying to assemble the $6 billion needed to make a rival bid for CBS, but has been blocked by Time Warner, which has worried about its own fledgling network and cross-ownership rules that prevent cable companies from owning broadcast stations.

For its part, Time Warner has been stalemated by its mountain of debt, its inability to spin off its cable operations and to sell its 20% equity stake in Turner at a premium price to help it pay down some debt.

The risk, of course, is that Malone and his long-time ally Turner, once they have seats on the Time Warner board, could orchestrate Levin’s ouster. One large shareholder, in fact, said that while a merger removes the threat of a hostile party buying the 15% equity in Time Warner owned by Seagram Co. and overthrowing the management, shareholders might prefer Turner to Levin.

Another scenario that has been making the rounds for several weeks is that Levin might want to head up the cable operation once it is spun off from the company.