Time Warner Investors See It Boosting Cable Unit Spinoff
Time Warner, taking a cue from Carl Icahn, will boost its cable spinoff later this year to reduce business conflicts among the firm’s divisions and spark more content deals with other companies, said investors and analysts. The company plans to give 16% of Time Warner Cable to investors when it completes the $17.6 billion purchase of Adelphia systems with Comcast by June 30 (CD Feb 2 p13). Observers we spoke with agreed that figure likely will reach at least 20% now that the firm has said it’s studying other options for the cable unit in a settlement with the financier (CD Feb 21 p10). Icahn had pushed for Time Warner to completely separate itself from the cable unit, an option one investor said he supports.
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Time Warner has “an open mind” about spinning off a larger stake, said a spokeswoman. “We would obviously look at the size of the spinoff,” she said. She wouldn’t elaborate beyond referring to a Feb. 17 company statement: “A different capital and corporate structure may be appropriate for Time Warner Cable in the future so long as it provides flexibility with the company’s content business.” Those remarks, along with a letter to shareholders from Chmn. Richard Parsons, disclosed the deal with Icahn.
Some investors would like Time Warner to go a step further, completely separating itself from the cable unit. Time Warner Cable has drawn shareholder fire for not working more closely with AOL to promote that Internet service over its own broadband product - a problem perhaps alleviated if the firms separate. “There is an inherent conflict in having these companies together,” said Mark Asset Management Pres. Morris Mark. TW cable “is a business that should be as separate as possible from Time Warner. It’s a different business. It [would] be good for both companies,” he said.
Parsons may ape Rupert Murdoch, who owns stakes in pay TV providers but not entire firms, Gabelli & Co.’s Chris Marangi said: “I wouldn’t be surprised to see Time Warner follow a News Corp. model and retain a stake in the distribution company as News Corp. with DirecTV,” he said. The analyst advises Gamco, which manages about $30 billion in stocks. A larger spinoff “makes sense in terms of capital structure,” said Jefferies & Co. analyst Robert Routh. “I think there’s a good chance of it.”
A much larger spinoff may not make sense due to sagging cable prices and tax benefits Time Warner would lose, said Neil Begley, a credit analyst at Moody’s Investors Research. Time Warner might carve out a 20% cable stake, but any higher percentage would mean the parent firm couldn’t cut income taxes via net operating losses attributed to Time Warner Cable, he said. “At least for the next couple of years, I would not think it wise,” said Begley. “I don’t see them going beyond [20%]. I also think they like the business; it is one of the fastest growing businesses, and ultimately I think it will be good for the stock.”
Time Warner’s stock, little changed in the past year, could use a boost. Shares have fallen about 2% since TW unveiled a 60% increase to a share buyback plan as part of the Icahn deal. Stocks usually rise when buybacks grow. “Public market valuations are extremely depressed,” Begley said: “They've never been this low in the 20 years I've been following cable.” His firm plans to meet with Time Warner officials in the next several weeks to get information to help decide if Moody’s will lower its debt rating on the firm, which is under review.
Time Warner Cable would be worth as much as $30 billion as a completely separate stock, Begley said. That’s 38% of its parent’s market capitalization. Despite Time Warner’s lagging shares, its cable systems are attractive, said cable banker Joseph Duggan: “They own some of the best assets in the country… There’s no downside as far as I'm concerned.”
- Jonathan Make; Alan Breznick