April 30 (Bloomberg) -- Time Warner Inc. Chief Executive Officer Jeffrey Bewkes said he will separate the cable-systems unit from the film and television businesses, bringing him a step closer to breaking up the world's biggest media company.

Time Warner also reported first-quarter net income fell 36 percent to $771 million, or 21 cents a share, from $1.2 billion, or 31 cents, a year earlier. Sales rose 2.1 percent to $11.4 billion, the New York-based company said today in a statement.

By disposing of the 84 percent stake in Time Warner Cable Inc., Bewkes is responding to pressure from investors to focus on the company's entertainment businesses and a turnaround at the AOL Internet unit. Profit at AOL plunged 74 percent in the quarter as a 1 percent increase in advertising sales failed to make up for a shrinking Web-access business.

``If you separate out cable, the content business is cheap,'' said Paul Greene, media analyst at T. Rowe Price Associates Inc. in Baltimore, which owns more than 59 million Time Warner shares among its $400 billion in assets. ``If they get cash from cable and use that to buy back shares of the parent company, that's very accretive.''

Time Warner fell 42 cents to $14.85 at 4 p.m. in New York Stock Exchange composite trading.

Excluding a gain from the sale of AOL's access business in Germany and other items, earnings of 22 cents trailed the 23- cent average of 17 analysts' estimates compiled by Bloomberg. Analysts projected sales of $11.3 billion.

Buybacks

Time Warner was formed in 1989 when Time Inc. and Warner Communications merged. In 2001, AOL bought Time Warner Inc. for $124 billion. Plans to sell TV shows and magazines online never gelled, and the company took $100 billion in writedowns a year later. The takeover also sparked lawsuits from shareholders who alleged AOL inflated its stock price to make the purchase.

Gerald Levin quit as Time Warner chief executive officer in 2002 amid record losses. AOL founder and Chairman Steve Case followed a year later. Time Warner's value, which peaked at $243.8 billion in May 2001, is now $53.1 billion.

Sales at Time Warner Cable rose 8 percent to $4.16 billion in the period. The unit's net income declined 12 percent to $242 million after marketing costs rose and the company recorded a gain from an asset sale a year earlier. Bewkes, 55, who became Time Warner CEO in January, said in February he would complete a review of the cable stake by the end of this month.

Shareholder Value

``Under the right circumstances, a complete structural separation is in the best interests of Time Warner and Time Warner Cable shareholders,'' Bewkes said on a conference call today. ``We're taking the right steps to deliver increasing shareholder value.''

Chris Marangi, a fund manager at Gamco Investors Inc. in Rye, New York, said splitting off the stake in Time Warner Cable would provide cash to repurchase $3.8 billion in stock. Marangi said his proposal for the cable unit may boost Time Warner's projected 2008 earnings per share by 28 percent through the reduction in stock outstanding.

Bewkes said the boards of Time Warner and the cable group are close to reaching an agreement on how the unit would be separated, without giving specific details. Under Marangi's plan, some Time Warner investors would exchange their stock for cable shares. He also projects Time Warner Cable will increase debt by 41 percent to $19.3 billion to fund a dividend and buyback.

`Full Spinoff'

``It was mostly anticipated by the Street that there would be a full spinoff of Time Warner Cable,'' said David Joyce, an analyst at Miller Tabak & Co. in New York. He recommends investors buy Time Warner shares and doesn't own any.

Time Warner, Walt Disney Co. and Sumner Redstone's Viacom Inc. all trade at 14 times estimated 2008 earnings. Time Warner shares have dropped 10 percent this year, and Viacom Class B shares have declined 12 percent. Disney, the second-biggest U.S. media company by sales after Time Warner, is little changed.

Two years ago, billionaire investor Carl Icahn tried to break up Time Warner into four pieces to increase the value of the shares to as much as $26.57.

AOL lost 647,000 Internet-access subscribers during the quarter, bringing the user base at the end of March to 8.7 million. The business has lost more than half of its customers in the past two years.

Overall revenue at the unit declined 23 percent to $1.13 billion, and operating profit totaled $284 million. AOL moved to New York this month to court Madison Avenue advertisers and is integrating purchases of online ad companies.

Ad Focus

In the remainder of 2008, AOL's ad sales will rise because of revenue from the Platform A network for buying and selling ads, Time Warner said in a regulatory filing today. Sales of so- called display ads shown on Web sites will fall in the current three months, partly because of ``expected continued challenges of integrating recently acquired businesses,'' the company said.

AOL's revamp may ultimately lead to its sale. Time Warner was close to giving control of AOL to Yahoo! Inc., which is fighting Microsoft Corp.'s $44.6 billion takeover offer, a person with knowledge of the talks said earlier this month.

Profit at the film unit fell 25 percent to $183 million on costs related to merging the New Line Cinema film studio with Warner Bros. Sales increased 3.5 percent to $2.84 billion. Time Warner projects another $20 to $30 million in charges this year related to the restructuring of New Line, bringing the total cost to about $140 million, Bewkes said.

Bewkes is cutting 450 jobs at New Line Cinema and has fired 100 headquarters employees. He reiterated a forecast for earnings growth of as much as 9 percent this year and is in the process of splitting off the declining AOL Internet-access division from the unit's ad business.

Profit at the cable-TV networks group, which includes TBS and HBO, rose 1.6 percent to $874 million on a 10 percent rise in sales to $2.66 billion.

Earnings at the publishing unit that includes Time Magazine and People more than doubled to $93 million on little-changed revenue.

(Time Warner held a conference call today. To listen to a replay, dial 1-800-288-9035.)

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net.

Last Updated: April 30, 2008 16:22 EDT