TW sends CD, DVD distrib biz up north

Proceeds to reduce total company debt

NEW YORK — Time Warner secured some much-needed balance sheet breathing room Friday, as it closed on the sale of its CD and DVD manufacturing and distribution business to Canada’s Cinram for $1.05 billion in cash.

Company said it will use the proceeds to reduce total company debt, which stood at $26 billion at the end of the third quarter. That’s down from a ledger-busting $30 billion gross debt load at the end of last year.

Considering Time Warner has had some hefty expenses in recent months — including $800 million to Bertelsmann for its stake in AOL Europe and some $400 million associated with legal liabilities stemming from its Six Flags investment — investors are pleased with the progress.

Ratings agency Standard & Poors evidently agreed. On Friday the credit arbiter removed Time Warner from its “credit watch” for the first time since August 2002, affirming its ‘BBB+’ corporate credit rating. While S&P still hedges its Time Warner rating with a “negative outlook,” the company’s removal from credit watch significantly reduces the likelihood of an imminent downgrade on its debt rating, which would affect interest costs.

S&P credited TW’s “concentrated effort at debt reduction from a combination of free cash flow and non-core asset sales” for the improved outlook.

“The rating on Time Warner reflects its strong content and distribution positions in media and entertainment, the online services market position it holds through America Online (AOL), and the company’s moderate capital structure,” said Standard & Poor’s credit analyst Heather M. Goodchild.

S&P noted, however, that these strengths are still dogged by risks associated with “the ongoing SEC and U.S. Dept. of Justice investigations and shareholder litigation, competitive pressures in all of its businesses from well-capitalized peers, and increased business risk at AOL.”

S&P was reasonably upbeat about the growth prospects for Time Warner’s traditional media and entertainment businesses as well as the struggling online division. However, Goodchild noted that the erosion in narrowband AOL subs is likely to continue due to heavy pressure from discount providers, while it’s too early to gauge whether it’s broadband push will “restore AOL’s previous levels of profitability.”

Time Warner execs last week said company is on track to reduce net debt to $20 billion or less by the end of 2004, at which time it can possibly buy back stock or make acquisitions. Still on the auction block are the Atlanta sports teams and possibly the music divisions.

The Cinram deal, first announced in July, includes sale of WEA Manufacturing, Warner Music Manufacturing Europe, Ivy Hill Corp., Giant Merchandising and the physical distribution operations of Warner-Elektra-Atlantic Corporation. As part of the deal, company said it has signed long-term deals with Cinram to manufacture, print, package and distribute DVDs and CDs for Warner Home Video and Warner Music Group in North America and Europe, and for New Line Home Entertainment in North America. The sales and marketing operations of WEA Corp remain as part of Warner Music Group.

Time Warner is in talks with numerous financial and strategic prospsective buyers or merger partners for its music group, as the company grapples with whether it wants to remain in the high-risk recorded music business that continues to suffer serious sales erosion. TW execs have already stated they are interested in selling off their Warner Chappel music publishing biz.

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