Is This Any Way For Time Warner To Raise Cash?

For the world's largest communications company, Time Warner Inc. sure knows how to stir up a world of misunderstanding. Its announcement on June 6 of a complex rights offering drove its stock from 117 to as low as 94, angered shareholders, and left plenty of people puzzled about how Chairman Steven J. Ross--known for charming Hollywood stars--could turn off so many people so fast. "Frankly, I'm mystified," says Richard Reiss, managing partner of Cumberland Associates, an investment firm that owns Time Warner preferred stock. The confusion underlines the difficulty Ross faces in deleveraging his company.

The offering would raise as much as $3.5 billion by providing current shareholders the chance to buy 34.5 million new shares, increasing the total number of shares to 92.3 million. The new stock's effective price is tied to the number of shareholders who participate. Investors would pay as little as $63 or as much as $105 for each new share. What infuriates investors is that they have to pony up more money to avoid diluting their proportional stake in the company. But if enough investors pass, those who do buy get more shares for their


Branding the offering as "coercive," several shareholders have already sued Time Warner. Time's original shareholders are still steaming over the company's decision to walk away from Paramount Communications Inc.'s $ 200-a-share bid in 1989. Those most offended by the new offering have now bailed out. Even so, it seems likely the company will get the 60% of shareholders needed to make the offering fly, because most of them believe Time Warner's assets will produce a rich return over the long haul. "Am I thrilled about this deal?" asks one major investor. "No. But I'm likely to subscribe."

By raising cash, Ross, who declined to comment for this story, is finally starting to chip away at the $11.2 billion debt that Time Inc. took on to buy Warner Communications Inc. Still, Ross--whom many describe as a fiscal conservative--can't be breathing much easier. A successful offering may get Ross past the first big hump in 1993, when Time Warner must come up with $3.3 billion to cover a bank loan. But he'll still owe the banks about $5.5 billion more by 1997 (table).

The rights offering also may be little help in making the company more appealing to the potential partners Ross is trying to lure into joint ventures around the world. The idea is to assuage any concerns that Time Warner might not have the financial muscle to carry its share of the load. But the partnership efforts now seem stalled. One eft-rumored candidate, France's Canal Plus, says its finances would not permit a meaningful investment in a company as big as Time Warner. Another possible candidate, Toshiba Corp., is pumping big money into new plants. Investment bankers in Tokyo say the company may be reluctant to commit major resources to a deal with Time Warner. Toshiba declined to comment. A Time Warner spokeswoman insists the company is still negotiating with half a dozen prospective partners and will announce at least one deal by the end of 1991.

Some investment bankers close to the company aren't so sure the terms of any deal will be anything to brag about. They say Time Warner has struck out because it is asking too much and is offering no management role to prospective partners. "They've tried to sell minority stakes at unacceptable rates," says one banker. "These are very hard deals to do." Others think the cash raised through the rights offering makes partnerships much less of an imperative: "Now they don't have to do any big deals," says Reiss. He believes Ross can pare down some of his debt with cash flow and refinance the rest.

LONG DROUGHT. Time Warner's basic operations remain healthy. The company had $279 million in cash at the end of March, and media analysts estimate it will have $350 million in unencumbered cash flow this year. The company's home-video, TV program syndication, and cable businesses are still churning out cash. Warner Brothers Inc. is banking on its new film, Robin Hood: Prince of Thieves, starring Kevin Costner. But Time Warner's magazines have been pummeled by the prolonged drought in advertising, which industry forecasters say won't lift until 1992. That has caused Time Warner's operating income to drop from $274 million to $256 million in the first quarter of this year.

There's also room for Time Warner to wring further earnings growth out of multimedia ad deals and new cable technology, such as a 150-channel cable-TV venture planned for parts of New York City. "Time Warner is uniquely positioned to exceed industry growth rates," says Christopher Dixon, a media analyst at PaineWebber Inc.

Steve Ross is not somebody to be counted out this early in the game. After all, he has weathered tough times before, most recently Paramount's last-minute takeover bid for Time. But with shareholders steaming and deals with foreign partners still elusive, the debt-burdened Ross seems unlikely to come up with a quick fix.

      Repayment       Bank debt    Public debt
      date              Millions of dollars
      1992                0            $44
      1993           $4,300 *          159
      1994            1,375            143
      1995            1,375            132
      1996            1,375            923**
      1997            1,375             NA
      TOTAL           9,800          1,400
      *Time Warner can draw from its revolving $1 billion credit line to help meet
      this payment
      **Due in installments from 1996 to 2017
      NA=Not applicable
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE