TW Cable plugs in perkier prospects

Low debt, growth should have investors lining up

NEW YORK — The birth announcement for Time Warner Cable last week was a quiet affair.

Perhaps too quiet.

Given parent company AOL Time Warner’s much-discussed woes, the new kid on the cable block isn’t likely to get the attention it might deserve.

The new entity — born of the $3.6 billion deal by which AOL Time Warner finally bought out its Time Warner Entertainment partner Comcast — should be something for the investment community to feast on: a pure-play cable operator with low debt, steady growth and prime urban subscribers.

It stacks up pretty well compared to its publicly traded peers. It’s second in size only to Comcast, and with a fraction of the latter’s debt load. It also has a fair amount of content clout, with all the benefits of being affiliated with one of the richest programming powerhouses in the entertainment business.

But, alas, this retooled cable conglom is born in inauspicious times.

Its cash-starved and market-weary parent AOL Time Warner desperately needs the proceeds of a planned stock market flotation of TWC to pare down debt, but a poor economy and the ongoing SEC investigations would seem to bode ill for any imminent IPO.

Even while the new cabler boasts a clean balance sheet and a bright future, its parent spends most of its time pleading for investor patience, debating SEC forensic accountants and trying to fix its ailing dial-up Internet business.

And investors are still a bit schizophrenic about cable companies, given the financial woes at Adelphia and Charter and the increasing pressure on profit margins from video and high-speed competition from telcos.

TWC’s future is somewhat of a gamble. It comes into the market at a critical transition time for all cable operators, which have forked out billions of dollars for network upgrades that must now start generating big capital returns in terms of video and data revenues. At the same time, pressure from DBS rivals remains intense and programming costs continue to rise, squeezing video margins as consumers draw the line on fee hikes.

It’s a cruel world, indeed. But Time Warner Cable deserves to be regarded as a viable player on its own merits.

It counts 11 million basic subs, a fully upgraded two-way interactive network and healthy subscriber growth in big fat urban clusters. It also boasts a front-row seat in the broadband evolution: Some 98% of AOL Time Warner’s 15.9 million passed homes have access to high-speed data connections, though so far only 14% have opted in. Still, that’s second only to New York area Cablevision, which has only just started getting its digital video service off the ground.

TWC also boasts some of the strongest credit measures of any cable company. Its debt load of around $8.1 billion is only a fraction of rival Comcast’s $30 billion, and should fall to $5.2 billion if the company can successfully pull off the $4 billion-plus IPO this year. On top of that, the company should deliver free cash flows of more than $850 million in 2003.

With AOL TW’s beleaguered America Online unit losing dial-up subscribers by the day, TWC’s broadband push won’t come a moment too soon — even if that means AOL’s loss is TWC’s gain. Cable is starting with a cleaner bill of health than its online sibling and could clean up handsomely in the stock market’s goodwill sweepstakes.

In fact, if AOL chairman and CEO Richard Parsons does manage to float Time Warner Cable later this summer as promised, it may be the warmest greeting he’s gotten from investors all year.

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