The mating dance between Toshiba and Time Warner has grown more serious. Officials at Toshiba, Japan’s third-largest electronics manufacturer, confirm their company is negotiating to take a “substantial equity position” in a venture with Time Warner.
Time Warner has been working for months to sell equity stakes in its core entertainment operations to important foreign partners. Now one major deal seems to be nearing fruition.
And speculation on what a potential deal may look like is making the rounds on Wall Street.
Sources close to the negotiations say Time Warner is looking to sell to a consortium of four or five foreign buyers as much as 50% of both its Home Box Office pay-tv unit and its Time Warner Cable Group, the second-largest cable operator in the U.S.
Time Warner would manage the partnership created by the transaction.
For its part, Time Warner would contribute to the partnership what it values to be $13 billion of assets – its 17.3 million subscriber HBO programming service, which almost singlehandedly fueled the cable industry’s extensive growth in the late ’70s and early ’80s, and its Time Warner Cable systems, which serve more than 6.14 million subscribers nationwide.
S.G. Warburg analyst Lisbeth Barron values HBO at about $2.28 billion, or 12 times estimated 1990 operating cash flow of $190 million. That would place a value of about $10.72 billion or $1,750 per subscriber on the cable system operations which had revenues of $522 million in 1989.
The foreign partners would contribute $6.5 billion in cash for a 50% share of those assets.
Time Warner would use those proceeds (sources note it would net the entire amount tax-free because of the partnership structure) to help pay down its massive $11 billion debt load.
Another scenario making the rounds adds 20% of the company’s Warner Bros, studio to the mix.
Sources say similar sell-offs could be enacted at the company’s other operating units; they point out that the company’s music and music publishing units would be of great interest to foreign suitors.
While a Time Warner spokesperson reiterated the company’s long-standing desire to form such strategic alliances – ones that would not only bring in cash but also would open new world markets – and says it is in the process of deciding between interested suitors, he would give no indication of how a deal would be constructed, who suitors are or how close they are to signing a deal.
Toshiba has been looking to expand its presence in American software, as have its electronics industry rivals Sony Corp. (which owns Columbia and the former CBS Records) and Matsushita (which recently purchased MCA). Such a pairing, especially if it included Warner Bros., would allow the company to follow the path of vertical integration taken by its rivals.
The cable tv connection also makes sense for Toshiba. The company is involved in a fierce battle with Sony and Matsushita to establish the industry standard for high-definition television. The Time Warner pairing could help the company avoid problems it has encountered in the past – in the 1970s the company suffered huge losses in unsuccessful battle with Sony and Matsushita to establish the standard homevideo player.
In addition to HDTV, Toshiba – already the world’s leading manufacturer of laptop computers – is developing new ways of linking personal computers to household tv sets to give enhanced viewing at reduced costs. A combination with Time Warner Cable and HBO could give Toshiba a decided edge over its rivals in developing both technologies and delivering them to the market.
But Toshiba officials warn that strong opposition from within their company could scuttle the deal. Some senior managers fear that a third Hollywood bid a Japanese electronics group could trigger another round of bitter Japan bashing in the U.S. and hurt Toshiba’s electronics exports.
Those exports already have been badly hit by the sanctions and adverse publicity that followed the discovery in 1987 that Toshiba had been selling classified U.S. technology to the Soviet Union.
Likewise, heads of major U.S. entertainment concerns say that such a transaction may jolt Capitol Hill into enacting some form of industry reregulation.
But most Toshiba officials feel that they cannot afford to be left out of the race with Sony and Matsushita.
Who the other members of the buying consortium may be is more of a mystery. French programming powerhouse Canal Plus has been one of the most widely speculated suitors.
Canal Plus operates the largest pay-tv network in France, and partially owns pay-tv channels in Spain, Belgium and Germany. But it is not clear exactly what Canal Plus would gain from such a pairing.
“Canal Plus does not need HBO in Europe,” says one programming industry source. “There’s not a whole lot of efficiencies that anybody can bring to that equation, they are basically the only pay-tv network in France and a very dominant one in a lot of other territories, and for that reason I expect their buying power is about as good as it’s going to get.”
Such reasoning may point to the inclusion of Warner Bros, in the mix. Canal Plus has exhibited considerable interest in Hollywood. In 1989, it acquired a 5% stake in Carolco Pictures and last month agreed to provide part of a $600 million financing package for movies to be distributed by Warner Bros.
Canal Plus could not be reached for comment.
Propelled by the speculation, Time Warner’s stock last week reached a new 52-week high of $115.50. It closed Friday at $109.38 a share, up 11.6% for the week.