Time Warner unplugs cable

Spinoff worth $10.9 billion

Time Warner unveiled on Wednesday its plans to unload the rest of Time Warner Cable in a move that will plunk more than $9 billion into the company’s coffers — cash that CEO Jeff Bewkes indicated he won’t be shy about spending to beef up the conglom’s content businesses.

He also assured investors that the separation doesn’t signify he has anything other than bright expectations for the cabler.

When cable companies were mainly video providers, Bewkes noted during a conference call, there was more of a rationale for housing content and cable under one roof. With TWC and others now “full-fledged telecommunications companies,” however, there’s not as smooth a fit. Selling the cable division, he said, will let TW focus on content.

“At this point, our content brands are very established, very strong. We don’t need an ownership link to one form of distribution,” Bewkes said.

In response to a question, he acknowledged that cable networks are “a good area. We will look at (everything). We are going to be disciplined in deciding any acquisition we choose to do. That being said, we can’t flash an advance.

“Stay tuned for what we are going to tell you over the next few months about the content business,” he said later in the call.

TW execs also noted that the cash windfall likely wouldn’t be in hand until the end of this year, when the complex transaction is expected to close. It requires a favorable ruling from the IRS and regulatory agencies.

The move, which will take TW’s ownership of TWC from about 85% to zero, is Bewkes’ most dramatic since taking the reins of the media giant early this year.

He had signaled in late April, when TW announced quarterly financial results, that such a step was imminent. It follows several waves of aggressive cost cutting and streamlining at TW’s film business and an ongoing share repurchase program — all aimed at trying to boost the company’s stock price.

The shares responded, with Time Warner Cable rising 3.5% to close at $31.27. Time Warner shares gained less than 1% to close at $16.24, but both stocks well outpaced the broader market, which slumped Wednesday on fears of rising oil prices.

For Time Warner Cable, the move will greatly increase its public float — meaning there will be many more shares available to trade.

That makes it much easier and more attractive for big institutional shareholders to buy into the company. The money TWC must borrow to finance the deal will inflate the company’s debt, but execs said strong cash flow should help ease it back down to target levels in a year.

Under former chief exec and current chairman Richard Parsons, TW spun off a 15% stake in the nation’s second-largest cable operator several years ago, creating a separate, independently traded company.

Parsons used to say that the new currency would enable the parent to “dial up or dial down” in cable. Many Wall Streeters felt at the time that “dialing down” would be preferable and urged Time Warner to sell off a bigger chunk of TWC, which, like all cablers, requires heaps of capital investment. Some investors, led by activist billionaire Carl Icahn, believed TW should go even further and split itself into several different pieces, including a stand-alone cable company.

Now, under Bewkes, Time Warner will exit the cable business entirely through a series of steps:

  • Time Warner will exchange its 12.4% interest in TW NY Cable, a unit of Time Warner Cable, for 80 million new shares of TWC’s Class A common stock — temporarily increasing its ownership to 85.2%.

  • Time Warner Cable will declare a one-time dividend to stockholders of $10.27 a share — for a total payout of $10.9 billion. Of that amount, parent Time Warner will receive $9.25 billion.

  • Time Warner will convert its TWC Class B super-voting shares into Class A shares, leaving TWC with only one class of common shares.

  • Lastly, the parent will distribute its entire ownership stake in TWC to Time Warner stockholders.

The company said the exact form of the distribution would be determined shortly before the closing of the transaction, based on market conditions. The lack of clarity on this point irritated some analysts since it’s hard to tell how the deal values TWC. But most were still relieved “to at least have the process started,” wrote Jeffrey Logsdon of BMO Capital Markets in a note to investors.

Overall, “This is the right step for Time Warner and Time Warner Cable stockholders,” Bewkes said. “After the transaction, each company will have greater strategic, financial and operational flexibility and will be better positioned to compete.”

He’s upbeat on the content businesses, which include Warner Bros., cable channels HBO and the Turner nets, as well as Time Inc. publishing.

“We do think that we’ve got very good secular growth prospects and that we will be growing faster than is currently realized out in the market,” he said. He cited “very strong momentum” in the cable networks biz and said the digital transition is boosting film, which will also see “dramatic improvements” from restructuring. After a wave of cost cuts at Warner Bros. in previous years, Bewkes has overseen the dissolution of both New Line and Warner Independent, with both being absorbed into the parent studio.

TW’s next big announcement could well concern another division, the struggling AOL unit that’s been trying to reinvent itself for years.

Recently, TW has said it wants to split AOL’s troubled subscription business from its more promising audience advertising side.

Without mentioning any names, Bewkes said AOL has been actively participating in the highly public flurry of talks among companies in the Internet space — which have included Microsoft, Yahoo and Google — but added he “can’t talk about what kind of arrangements might be possible for us.”

“We think AOL is in a good position in the marketplace,” he said.

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