Will Turner Bring A Turnaround?

Time Warner (TWX) shareholders have watched the bull market pass them by. Indeed, the media-and-entertainment giant's stock has headed south, to 39 a share, down from 45 1/4 in February. But big shareholders haven't rioted at Time Warner's shabby performance.

Such heavyweights as Mario Gabelli, whose funds own 4.5 million shares, and Herb Ehlers, whose Liberty Capital Management has 4 million, think the stock will wake up when certain events unfold. And new Time Warner bulls aren't complaining, either.

"It gives us a chance to accumulate shares quite cheaply," says New York money manager Lew Rabinowitz. He says this large-cap remains "one of the most undervalued asset plays around." Rabinowitz, president of R. Lewis Securities, thinks Time Warner offers value-hunters a piece of a premier collection of prized assets. The stock, he says, "has the potential of joining the ranks of the high-flying giants, such as IBM and GE."

For Rabinowitz, the key is Ted Turner. "We are convinced Turner will rescue investors from Time Warner's long period of underperformance," he says. Time Warner completed acquisition of Turner Broadcasting on Oct. 10, elevating Turner, who holds 11%, to vice-chairman of the merged outfit.

Rabinowitz believes Turner will play a big role in forging a deal to unravel Time Warner's partnership with U S West Media Group, which owns 25% of Time Warner Entertainment. This unit includes the cable systems, Warner Bros. Studios, Home Box Office, and Cinemax. Shareholders have been pressing management to split the cable and programming assets and take full ownership of programming.

Both Gabelli and Rabinowitz believe an agreement will be worked out for Time Warner to give up part of the cable assets in order to gain full control of programming, which is a big cash-flow generator. They're convinced that, with prodding from Turner, Chairman Gerald Levin will finally move to cut a deal with U S West. Recently, Time Warner indicated a willingness to lighten its cable holdings to become a more integrated content provider.

Analyst David Londoner of Schroder Wertheim notes that, since the programming or content assets are net cash contributors, an accord with U S West will improve Time Warner's balance sheet and be able to pay down debt from internal cash flow. He says the company will be in a positive cash-flow position by early 1997 if it solves the complex cable puzzle.

As it stands, Londoner puts the private-market value of Time Warner's assets at $66 a share, based on his 1998 cash-flow estimates. This indicates a near-term target for the stock of 50 a share, he says.

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