Time For Time Warner To Unhook Cable

There are obstacles, but CEO Parsons has a spin-off high on his to-do list

After four years and four months as CEO of Time Warner, Richard D. Parsons is running out of options to solve his most vexing problem: share-price paralysis. He has settled federal accounting investigations, cut debt, bought back stock, turned AOL into a free service, and Sept. 12 announced the sale of 18 of its magazines. None of these moves has pushed shares above $19. Now he's readying to play one of his remaining cards: a cable initial public offering. By spinning off part of the media giant's robust cable unit, Parsons is hoping not only to create a new currency to buy more cable but also to juice the parent company -- and his own legacy in the process.

Investors like the idea, especially now that cable is popular again, having scored successes with their bundles of TV, broadband, and phone services against a diminished threat from satellite and telecoms. Time Warner Cable, subsumed as it is in the sluggish parent company, could unleash its true value with some independence, the thinking goes.

So why not plunge in while the market is so hot? After all, Parsons first mentioned a possible spin-off four long years ago. But nothing is ever easy at Time Warner, which once again looks to be snakebitten. The problem: The company has been entangled in the messy four-year Adelphia Communications Corp. (ADELQ ) bankruptcy. Time Warner and Comcast Corp. (CMCSA ) divvied up Adelphia's well-placed systems in a sale that closed in July, but now creditors are bogged down in squabbles, holding up Parsons' cable agenda.

The original plan was to issue shares representing 16% of the cable business to Adelphia creditors as part of Time Warner's deal payment. That would create a ready market for the unit, whose operating profits rose 16% in the first half of the year, to $1.96 billion. The Adelphia sale is complete, but creditors still disagree over how to split up the proceeds, and they do not appear to be close to a final agreement to exit bankruptcy. Yet if the creditors were to give a thumbs-up to a plan, with a bankruptcy judge's approval, Time Warner Cable could go public as soon as 30 days later.

Wall Street, including media-loving private-equity buyers, would like to see faster action -- and a bigger share than a mere 16% of the business. "That percentage may not be enough" to see big gains in the cable stock, or Time Warner's stock, either, says Michael Nathanson, an analyst at Sanford C. Bernstein & Co. "I would like see them put out more."


It's not hard to see why investors covet the nation's No. 2 cable operator. If you value Time Warner Cable at $3,700 per subscriber (using No. 1 Comcast as a benchmark), multiplied by its 13.5 million subs, the unit would be worth $49.9 billion. Subtract the estimated debt of $16 billion, and a 16% float has a market value of $5.4 billion. Parsons insists 16% is the right amount to offer at the outset but has said he would consider selling more later.

With so much at stake, Parsons has also begun to prepare an alternative to the dicey Adelphia plan. Time Warner is in the process of filing a registration plan with the Securities & Exchange Commission to sell shares via a standard IPO. On this path, it could take three months to win SEC approval. But by then, who knows how Wall Street will feel about cable stocks? Time Warner officials declined to comment, citing restrictions due to the planned share registration.

Meanwhile, billionaire breakup advocate Carl C. Icahn is once again amassing Time Warner shares, putting more pressure on Parsons to act. The magazine sale is already under way. By the time it actually happens, a separate Time Warner Cable stock issue could be just another move in a new, more urgent game plan.

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By Tom Lowry

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