Time Warner (TWX) took an important step toward regaining investor confidence on Oct. 18 with the announcement that it would create a separate stock for its cable TV business and sell a 16% stake to the public.
The company officially pegged the value of the initial public offering at $100 million, although that value is used only for establishing fees that will be paid to the government. The actual value of the IPO could be in the neighborhood of $5.4 billion (see BusinessWeek.com, 9/25/06, "Time for Time Warner to Unhook Cable").
The proceeds of the IPO will go to investors in bankrupt cable operator Adelphia Communications, which was acquired by Time Warner and Comcast (CMCSA) for $16.7 billion. Time Warner won't receive any capital from the transaction. Time Warner will retain about 90% control of Time Warner Cable through its ownership of a second class of shares. Time Warner declined comment, citing the restrictions of the quiet period associated with its IPO filing.
Investors are happy with the move, nonetheless. Time Warner shares rose 20 cents, or 1%, to $19.58, on Oct. 18. They have come a fair way since last winter, when they traded at about $17 and shareholder activist and financier Carl Icahn was calling for the breakup of the media conglomerate (see BusinessWeek.com, 2/8/06, "Icahn's Plans for Time Warner"). The stock is up about 20% since July. "My sense is that investor sentiment in Time Warner is improving," said Morris Mark, managing partner of Mark Partners. The investment company owns 1 million shares of Time Warner, according to its most recent disclosures.
Investors say they like the IPO for several reasons. It was no surprise that Time Warner had to find a way for Adelphia investors to sell their stake in Time Warner Cable, but Time Warner could have gone about that in several ways. Instead of a private, unregistered offering, the company chose to sell them on the public market. That is helpful for several reasons. It gets the Adelphia investors out of Time Warner in one fell swoop, allowing actual cable investors to replace the investors who held the shares only as a result of a play on bankrupt Adelphia.
In addition to improving the shareholder base, the IPO creates a market for Time Warner Cable, which will trade under the symbol TWC on the New York Stock Exchange. That's helpful because it establishes a value for the cable business. Icahn and other investors have argued that Time Warner is trading at a discount because investors can't figure out what individual pieces of the conglomerate are worth. "The way this was done is very positive," Mark said.
"Fundamentals Have Improved"
The IPO also sets the stage for a larger offering of stock, or perhaps even a spinoff of the entire cable business. That probably would be a welcome turn of events for investors, who have become more enthusiastic about cable. Public and private investors have been interested in the sector. Media giant Viacom (VIA) has created a separate stock for its cable unit (VIA-B) The Dolan family has offered to take Cablevision (CVC) private in an $11.3 billion management-led buyout. Cox already is private.
The Time Warner Cable unit has been performing fairly well. "The fundamentals have improved," says one investor, who had been unhappy with the company's past performance and declined to be identified. The unit generated about $5.3 billion in revenue for the first six months of the year, up 15% from the same period in 2005. That's about 25% of all Time Warner revenue. It generated about $1.1 billion in operating income and about $2 billion in earnings before income taxes, depreciation, and amortization, or EBITDA. That solid cash flow has made it appealing to investors. With fewer opportunities for public investors in the cable sector, demand for Time Warner shares could be strong.
Keeping It Together
It's looking less likely that Time Warner CEO Dick Parsons will have to fight a rematch with Icahn and other investors. The main question now is whether Parsons can show results from the overhaul at AOL (TWX), which is opening its service to the public for free. The early signs suggest that traffic hasn't fallen too much and that advertising revenue has climbed somewhat, investors said.
Few investors want to see a breakup of the company. That doesn't mean that they won't welcome the sale of non-core assets, such as the recent sale of AOL UK to Carphone. For the moment, Parson's hand is controlling the remote at Time Warner.