May 21 (Bloomberg) -- Time Warner Inc., pressured by investors to break up a media conglomerate built over 20 years, will spin off its cable-television unit and receive a $9.25 billion one-time cash dividend in the transaction.

Chief Executive Officer Jeffrey Bewkes said the separation gives Time Warner funds to make purchases, return cash to shareholders, or invest in remaining film, TV, Internet and publishing businesses. Time Warner Cable Inc. will borrow $10.9 billion to fund the payout to its parent, which owns 84 percent, and other shareholders. The amount is equal to $10.27 a share.

``Time Warner is a company in the midst of a sweeping transformation,'' said Matt Kaufler, a portfolio manager at Clover Capital Management in Rochester, New York, which owns 1.7 million shares. ``There will be more steps before year-end. This is headed toward being a pure content company.''

Bewkes, who took over Jan. 1, said on a conference call today that Time Warner no longer needs to own a cable operator to carry its movies and TV shows because it has established brands and more options for distribution. His predecessor, Richard Parsons, fended off efforts by shareholder activist Carl Icahn to dismantle the New York-based company in 2006.

Time Warner, the world's biggest media company, gained 9 cents to $16.24 at 4 p.m. in New York Stock Exchange composite trading. Time Warner Cable rose $1.05, or 3.5 percent, to $31.27.

Time Warner's stock more than doubled between 1998 and the announcement of the company's combination with America Online Inc. in January 2000. Since AOL completed its $124 billion takeover of Time Warner in 2001, the shares have plunged 65 percent, and have fallen in four of the past seven years.

Buyback Plan

``The transaction improves flexibility for both Time Warner and for Time Warner Cable,'' Bewkes said on the call. Bewkes, 55, said in April that Time Warner would get rid of the unit.

Time Warner said in a statement it will distribute its holding in Time Warner Cable ``in a tax-efficient manner.'' The exact distribution form has yet to be decided and will depend on market conditions, the companies said.

``The dividend is larger than expected,'' said Chris Marangi, a fund manager at Gamco Investors Inc. in Rye, New York, which owns 10.9 million Time Warner shares. He said he estimated a dividend of $5 to $6 a share and anticipates Time Warner will use the proceeds for a stock buyback.

Time Warner Cable, the second-largest U.S. cable company behind Comcast Corp., will fund the dividend through an existing revolving credit facility and $9 billion from a new two-year syndicated loan. Both companies said they aim to have ``solid investment-grade credit ratings'' after the transaction.

Debt Ratings

Standard & Poor's said today that it will likely reduce Time Warner's long-term debt ratings by one level to BBB, the second-lowest investment-grade rating, after the split. S&P said the expected downgrade is because Time Warner is losing the cable unit, its ``most predictable source of growth.''

S&P rates Time Warner Cable's debt BBB+, on watch for a possible downgrade because of the financing for the dividend.

Moody's Corp. affirmed Time Warner's and Time Warner Cable's Baa2 ratings, the second-lowest investment grade level, and said the outlook for both is stable.

The additional debt comes on top of the $13.5 billion Time Warner Cable reported at the end of the first quarter. The company can handle the amount, capitalizing on increasing earnings and stable cash flow, without taking on too much risk, Sanford C. Bernstein & Co. analyst Craig Moffett wrote in a report today. He expects the stock to outperform the market in the next year and doesn't own the shares.

Before the dividend payment, Time Warner is trading a separate stake in a smaller division of Time Warner Cable for more shares, boosting its ownership to 85.2 percent.

Bond Reaction

Time Warner Cable's $1.5 billion of 6.55 percent bonds due in 2037 fell about 3 cents to 95.9 cents on the dollar at 11:20 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 6.9 percent, or 233 basis points more than similar- maturity Treasuries, Trace data show. A basis point is 0.01 percentage point.

Credit-default swaps tied to Time Warner Cable's debt climbed 10 basis points to 135 basis points, according to Lehman Brothers Holdings Inc. The contracts, used to speculate on a company's ability to repay its debt or to hedge against losses, rise as investor confidence declines. They fall when sentiment improves.

Contracts tied to Time Warner bonds dropped 3 basis points to about 115 basis points, Lehman prices show.

Building Time Warner

Time Warner was formed in 1989 when Time Inc. and Warner Communications merged. In 1971, Warner Communications, under the leadership of CEO Steven Ross, acquired TeleVision Communications, an Ohio-based cable-TV operator, and the cable- TV business of Continental Telephone Corp.

Time Warner's stock more than doubled between 1998 and the announcement of the company's combination with America Online Inc. in January 2000.

In 2002, Gerald Levin quit as CEO amid record losses, a year after Time Warner combined with America Online. AOL founder and Chairman Steve Case followed in 2003. Since then, earnings at the Internet unit have declined as advertising sales fail to make up for a shrinking Web-access business.

Billionaire investor Icahn tried to break up Time Warner in 2006, saying the companies were worth more to investors separately than they were together. Former Time Warner CEO Parsons responded by selling a 16 percent stake in Time Warner Cable, buying back more shares of Time Warner and adding independent directors to the board.

Citigroup Inc. and Goldman Sachs Group Inc. are advising Time Warner on the transaction, along with BNP Paribas, Bank of America Corp., Deutsche Bank AG, and Wachovia Corp. Cravath, Swaine & Moore LLP is providing legal advice.

Time Warner Cable is getting financial advice from Morgan Stanley and legal advice from Paul, Weiss, Rifkind, Wharton & Garrison LLP. Evercore Partners Inc. and Skadden, Arps, Slate, Meagher & Flom LLP are counseling the company's independent directors.

To contact the reporters on this story: Sarah Rabil in New York at srabil@bloomberg.net; Lars Klemming in Stockholm at lklemming@bloomberg.net

Last Updated: May 21, 2008 16:22 EDT