If Time Warner Divides Itself, Can It Conquer?

Save for a stint in the Marines, 66-year-old Alan Gerry has lived in tiny Liberty, N.Y., most of his life. He learned how to fish in the surrounding Catskills. His Saturdays are sometimes spent gossiping at the Liberty Diner. Indeed, Gerry would blend right into his hometown except for one thing: He built a $2.6 billion cable-TV empire called Cablevision Industries Inc. without issuing so much as a share of public stock. "We're probably a little proud of that," he says.

On Feb. 7, Gerry swapped his equity for that of Time Warner Inc. Now, his fortune is subject to Wall Street's ever-shifting opinion of Time Warner Chairman Gerald M. Levin. Valued at upwards of $600 million in a stock deal that has Time Warner assuming $2 billion in Cablevision debt, Gerry's stake relies on this gamble: Can a complex strategy hatched by Levin to restructure the company finally make Time Warner's stock take off? "I'm not overly concerned," Gerry says.

Some think he should be. If the Cablevision acquisition and other recent deals go through, Time Warner will face a towering $19 billion of debt. Levin says he will lighten the load by selling selected assets--including a 20% stake in Turner Broadcasting System Inc. and scattered cable systems representing about 200,000 subscribers. He then plans to spin off Time Warner's cable properties, which serve more than 11 million subscribers, into a new company. The rationale: Since cable reregulation has slowed cash flow in the short term, the cable assets are needlessly dragging down Time Warner's shares. Segregating them would allow investors to enjoy the growth potential of a "clean" entertainment company, while participating in a solid cable/telephone strategy that is still incubating.

TOUGH NUT. The problem: Most of Time Warner's cable systems already have been placed in a separate entity called Time Warner Entertainment LP. That company, 63% owned by Time Warner Inc., also includes Warner's film studio and its HBO cable channel. The rest is owned by Baby Bell U S West (25.5%) and Japan's Toshiba and Itochu. Figuring out true asset values and detaching entertainment properties from the cable systems would be hard enough. Doing so without diluting or otherwise displeasing shareholders such as Seagram CEO Edgar Bronfman Jr.--who has a 15% share of the common stock--would be harder still.

Under one scenario discussed by analysts, Time Warner could contribute its two most recent cable acquisitions--Cablevision and Houston Industries (both of which it owns outright)--to a publicly traded cable-only company. After much shuffling, the parent company would then keep the entertainment properties for itself. Time Warner Entertainment would disappear.

But why would U S West go for that? Three years ago, the Baby Bell invested $2.5 billion in the entertainment subsidiary partly to get access to the studio and HBO. Hoping to eventually send video down its phone lines, it wants a source of programming. Analysts agree that U S West's stake in the programming assets alone is now worth more than $3 billion. "I think it would be very difficult for them to give up" those investments, says a top Time Warner executive.

Many analysts believe Levin likely will have to cede something more to make his partners whole--especially since they're under no obligation to agree to any sort of plan at all. Will he surrender equity in the cable assets? Maybe, but how much is fair to Time Warner shareholders? Does he trade equity in the parent? Again, maybe. But that could be dilutive.

The goal likely would be to create two separate stocks that would add up to more value than a single Time Warner share. Says Time Warner finance chief Richard J. Bressler: "Anything we do will create value for all of our constituencies." Still, getting there could conceivably pit the interests of U S West against Bronfman. Bronfman wasn't available for comment, but U S West says it is taking a wait-and-see attitude: "We are very happy with the package of assets we invested in," says Thomas E. Pardun, CEO of U S West Multi-Media Communications Inc. "While we are willing to talk, there is no proposal on the table."

Restructuring or no, Levin's most important tasks are to shave debt and improve cash flow. To help, Levin says he wants to sell $2 billion to $3 billion worth of assets within 18 months. But Wall Street may cry for more. "Levin is going to have to get this done," says one former Time Warner executive. "He can't come back in a year and a half and say: `Sorry, it was too hard to do."' At that point, even Alan Gerry, like Bronfman, might find himself concerned. Just a little.

Cable Spree

Recent cable deals by Time Warner


*Not Applicable. Joint venture.


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