Atlanta broadcaster Ted Turner will drop his current hostile takeover bid for CBS Inc. if he is unable to stop the company from buying back $954.8 million worth of its own stock, according to a top Turner aide who testified here today in federal court.
However, the aide said that in the event Turner loses the lawsuit and drops his current bid, he plans to launch an alternative proposal. Rather than trying to gain control of the company by purchasing shares, the new bid could be a proxy fight, a tactic Turner has considered since March, according to testimony by Turner Broadcasting System Vice President William Bevins Jr.
In a proxy fight, Turner would try to gain control of CBS by nominating his own slate of directors and soliciting the votes of CBS stockholders. This would enable Turner to proceed with his campaign to gain control of CBS even if he is unable to raise the cash needed to make a more financially viable offer to purchase its shares.
In hearings that began here today, Turner asked Judge Robert L. Vining of the U.S. District Court for the Northern District of Georgia to block the CBS stock buyback plan on the grounds that it is designed to entrench incumbent management, regardless of the best interest of CBS stockholders. Turner also charged that the plan gives the company's founder and director, William S. Paley, certain "unjustifiable special benefits" not available to other shareholders.
Judge Vining is expected to rule by early next week, before the CBS offer expires on July 31. The judge gave no indication today of how he might rule.
CBS is offering to repurchase 21 percent of its stock at $150 a share. The plan includes provisions that restrict the amount of debt the company can have on its books. Turner's current takeover bid, which relies primarily on borrowed funds, would violate several of those provisions.
CBS argued today that its stock buyback plan does not preclude takeover bids that do not rely imprudently on borrowing. The company also asserted that a stock buyback plan had been under consideration for about a year, long before Turner announced his takeover bid in April.
CBS also questioned whether a federal judge should intervene in the business decision of its board of directors, because the company relied on outside financial advisers and carefully considered the impact of the stock buyback plan before proceeding.
The CBS opening arguments were delivered by David Boies, an attorney with Cravath, Swaine & Moore, while the Turner opening statement was delivered by Sherman & Sterling attorney Joseph T. McLaughlin.
The hearings today provided an unusual behind-the-scenes look at a controversial takeover bid that is still in progress. For example, Turner Broadcasting Vice President Bevins revealed that he privately had said Turner's non-cash takeover bid had "maybe a one in three" chance of succeeding, while Turner had told him he believed it had only about a 10 percent chance. Turner believes that even if his bid fails, it would give Turner Broadcasting, which owns Cable News Network, a higher profile and better relationships with major advertisers, Bevins said.
Bevins also discussed Turner's unsuccessful attempt to raise cash to increase his takeover bid earlier this month. Bevins said that Turner and his financial adviser, E. F. Hutton, had attempted to raise $2.6 billion, consisting of $1.6 billion in bank loans and $1 billion in equity investment. The identities of the investors who were contacted were not revealed in court today.
Secret memos prepared by the CBS investment banker, Morgan Stanley & Co., and Turner's investment banker, E. F. Hutton, were submitted as evidence. The documents all relied on code names so that an outsider who accidentally obtained a proposal would not be sure about the identities of the companies involved. The Morgan Stanley code names were "Project Thriller" and "Project Victory," named after albums recorded by CBS Records superstar Michael Jackson. One of the Hutton code names was "David versus Goliath," a reference to Turner's uphill fight with the giant CBS.
In a legal brief filed with the court, Turner said that Morgan Stanley advised CBS that its stock could trade as low as $99 a share following the stock buyback. Turner suggested that the reason the price could drop -- it closed today at $118 -- is that the market will recognize that "poison pill" provisions adopted by CBS preclude future takeover offers at a premium price. Turner also argued that the CBS stock buyback includes provisions that make the proposal "coercive," by taking away the freedom of CBS shareholders to choose from among competing offers.
"If this CBS offer is completed, this will kill the TBS offer," said E. F. Hutton Vice President Peter Chiapetta. "It the CBS plan is a coercive tender offer."
Chiapetta disclosed under cross-examination that he no longer had a list of potential investors that he had prepared for Turner earlier this month. Chiapetta said the list had been "scribbled" on the back of a piece of paper that he has thrown away.
He also conceded under oath that while the stated value of Turner's takeover bid is $175 a share, two of his associates prepared analyses at $135 a share and $150 a share, after reading reports indicating that the true value of the Turner offer was significantly less.