In the coming weeks, the AOL of AOL Time Warner (TWX ) Inc. will be stripped from building facades, corporate letterheads, and eventually Wall Street tickers. Make no mistake, though: Even with the name change, approved on Sept. 18, America Online (TWX ) woes still pervade the world's largest media company.
Nobody is feeling this more than execs at Time Warner Cable, who had hoped by yearend to have reached two goals: to be trading as a separate company and to have helped the parent company pay down billions in debt from the stock sale. For nearly nine months, cable execs have been in a quiet period in anticipation of a partial initial public offering. Now it appears the restraint was all for nothing: Execs at headquarters recently shelved the IPO, doubtful of Securities & Exchange Commission approval to register the shares as long as regulators were still burrowed in their investigation of aggressive accounting at the online unit.
The IPO postponement is clearly a setback for the nation's No. 2 cable operator. But it's also a blow to Time Warner CEO Richard D. Parsons' original plan to shore up the balance sheet, testing his agility to find new ways to raise cash. Trading separately at a time of rising cable stock prices would have given Time Warner Cable its own currency to make acquisitions. In the past year, competition between cable and satellite has intensified, and the unit could use added heft in the shadow of Comcast (CMCSK ) the industry's new goliath. More important, the cable IPO could have raised as much as $2 billion in cash. While the Time Warner CEO has slashed more than $5 billion from nearly $30 billion in debt since January, he had been counting on a robust cable offering. After all, besides the accounting investigation, Parsons' second-biggest challenge is showing Wall Street he can quickly erase debt. Until he resolves both, Time Warner's shares, languishing at $16, aren't likely to be useful as deal currency for any of the units.
But thanks to some surprises, such as a $750 million settlement from Microsoft Corp. in May, Parsons admits some of the pressure is off to sell pieces of the company hastily. At the moment, he's ahead of his goal to reduce debt to $20 billion by the end of 2004 (table). "We've had some successes that obviate the need now for the IPO," says Parsons.
As a result, the CEO is reshaping his game plan. Sales of assets once considered disposable, such as Warner Books (TWX ) Inc., are on hold until better offers arrive. And units that were said to be core, such as recorded music and music publishing, are mentioned as possible sell-offs. "We always felt music was in need of restructuring," says Parsons. "When you produce music in 70 countries, you need to rationalize overhead to strengthen the business, particularly against the winds of piracy." Warner/Chappell Music (TWX ) Inc., which controls 1 million copyrights, could garner more than $1 billion. And execs will create either a joint venture for Warner Music Group or sell a majority of it. A deal with London's EMI Group PLC, for example, could raise $1 billion upfront.
With the cable unit no longer critical to Parsons' debt goal, its execs, under wraps for so long, can now openly push their products in the changed cable arena. With 10.9 million subscribers, Time Warner runs a distant second to Comcast, with 21 million. Clearly, scale can make it easier for operators to negotiate favorable equipment and programming prices -- crucial savings as companies face stiffer competition. But Time Warner Cable CEO Glenn A. Britt says doing deals is less important than selling new services, such as video-on-demand, high-definition TV, and personal videorecorder options. "I'm not worried about our size," says Britt. "We are big enough to support our technological overhead."
IPO or no, prospects for the $7.7 billion cable division are still bright, say investors. Its earnings this year will account for about one-third of the parent's overall $9.2 billion in earnings before interest, taxes, depreciation and amortization (EBITDA), estimates Morgan Stanley. And a rollout of new services has begun. By yearend, Time Warner Cable will be ahead of any other operator, with nearly half a million subscribers to a personal videorecorder service (similar to TiVo Inc.), and could have as many as 1 million phone subscribers by 2006. Next year, cable will generate an estimated $860 million in free cash flow.
Parsons will certainly welcome the contribution to his debt-reducing mission, especially since there is no predicting when AOL's bad karma might strike again. The company faces more than 30 shareholder lawsuits, stemming mostly from AOL's problems, and uncertain sums in settlements. Parsons can use all the cash he can get his hands on.
By Tom Lowry in New York