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Probes chip away at Time Warner profits

Revenue grows 5% to $10 bil

NEW YORK — Third-quarter profits slipped 7.9% at Time Warner as the conglom set aside $500 million to fund a potential settlement of a federal probe.

The Securities and Exchange Commission and the Justice Dept. are investigating TW’s accounting of its stake in AOL Europe before it bought out partner Bertelsmann in 2002.

Excluding the impact of the $500 million set-aside, the world’s largest media conglom met or slightly exceeded most estimates thanks to strong performance from its TV networks, cable and publishing units in the quarter, ended Sept. 30.

Revenue at Time Warner’s film studios and TV production house decreased slightly due to tough comparisons with 2003, when New Line released “The Lord of the Rings: The Two Towers” and syndie revenues flowed to Warner Bros. from “The West Wing” and “Friends.”

Chairman Dick Parsons also provided a postmortem on the failed bid for MGM, which he claims was misrepresented in the press.

Revenue at the conglom, home of HBO, America Online and CNN, grew 5% to $10 billion vs. third quarter 2003. All segments contributed to the uptick.

“I’m particularly pleased that the growth in advertising revenues is the best we’ve seen in years,” Parsons said.

Profits fell to $499 million from $541 million. Results were impacted by the creation of the $500 million reserve but were helped by proceeds from the sale of Google shares and TW’s stake in Teutonic music channel Viva.

More significant, however, was the additional clarity on the Justice Dept. investigation, which has dogged the company since 2002. “The fact that for the first time they were willing to put a number on it means they’re progressing to the point where they think they know what the settlement will be,” said Tom Wolzien, analyst at Sanford Bernstein.

But a potential settlement does not include any shareholder litigation. “There’s no estimate on how big the civil suits could be,” Wolzien noted.

Third-quarter results were led by the cable networks, which saw revenue increase 8% to $2.2 billion, reflecting an 8% jump in sub revs due to increased fees at Turner and HBO.

Ad revenue at the networks was up 8%, including a 12% increase at Turner and a 3% decline at the WB network.

Also strong was TW’s cable system, the second largest in the nation. Revenues climbed 10% to $2.1 billion thanks in part to 168,000 new high-speed data customers. Video subs fell by 11,000, leaving the company with 10.9 million subscribers at the end of the quarter.

Media and communications group chairman Don Logan said the company would offer phone service to every cable customer by year’s end and would investigate offering wireless service via a partnership or acquisition.

Film unit revenue increased 1%, benefiting from international sales of Warner’s “Harry Potter and the Prisoner of Azkaban” and “Troy,” offset by declines in domestic theatrical grosses.

Revenues were essentially flat at AOL, which will lay off an additional 700 employees as it moves to transform itself from a provider of dial-up Internet service to a broadband Netco. AOL has lost 2 million dial-up customers over the past year, but saw a 44% increase in advertising revenue, helped by the acquisition of Advertising.com.

Magazine and publishing saw revenue increase 3% to $1.4 billion. The company will launch four magazines this year — All You, Cottage Living, Nuts and Suede — and it relaunched Life magazine as a weekend newspaper insert.

On to acquisitions

With the company’s once-crushing debt cut to $16.8 billion, the talk at TW is about acquisitions.

Parsons said the company is in the early stages of evaluating Adelphia Communications as part of a joint bid with Comcast for the cabler.

He also gave his version of events on how the Lion got away.

The New York Times reported over the weekend that Time Warner continued to negotiate with MGM after publicly declaring it had withdrawn from the process.

Not the case, Parsons said. Rather, a group of strategic partners approached the conglom 10 days after it abandoned its bid, offering to put additional cash into the deal. Time Warner then asked MGM about getting back into the process, with strengthened financials, but balked when the Lion asked for a $150 million nonrefundable deposit — the same amount Sony had paid as part of its bid.

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