Cable split could slow growth

Time Warner’s Bewkes begs to differ with Street’s analysis

After the separation of Time Warner Cable late this year, Time Warner will be a more content-focused company and get $9.25 billion for further stock buybacks, dividends, acquisitions and investments into existing businesses.

Analysts said that getting rid of TWC under a deal unveiled Wednesday will lower the growth rate of the remaining assets given that TWC has been leading operating income before depreciation and amortization gains at the conglomerate.

However, TW president and CEO Jeffrey Bewkes took issue with Wall Street concerns about the outlook for the TW content and AOL businesses. “We will be growing faster than I think is currently realized out in the market,” he told analysts.

Bewkes cited digital opportunities, recent restructurings at the film unit and strong momentum at TW’s TV networks as reasons why the core content operations could end up surprising investors. But he declined to provide growth guidance for the restructured TW.

UBS analyst Michael Morris said that the market capitalization of TW would decline from $58.4 billion to $42.6 billion post-split. This year’s earnings per share will hit $1.09 before the split, but reach only 85 cents post-split, he projected while reducing his 2009 earnings estimate from $1.24 to 91 cents per share. Morris also sees operating income before depreciation and amortization falling to 6.1% next year for the reshaped TW.

While other debt ratings agencies expressed little concern about the deal, Standard & Poor’s Ratings Services said Wednesday that it likely will cut its long-term ratings on TW because of its new focus on content units. S&P analyst Heather Goodchild cited “the departure of the company’s most predictable source of growth (in TWC) and the increased exposure in the future to the volatile performance of filmed entertainment, as well as to the turnaround process at AOL.”

Under the multistep separation process unveiled Wednesday, TWC will declare a $10.9 billion one-time dividend to all of its stockholders, including $9.25 billion flowing to TW, just before the completion. That payout amounts to $10.27 per TWC share, well above the $6 estimates of some analysts.

In the end, TW will distribute its entire stake in TWC to stockholders in a tax-efficient manner that will either take the form of a spinoff or split, depending on market conditions.

“After the transaction, each company will have greater strategic, financial and operational flexibility and will be better positioned to compete,” Bewkes said. “Separating the two companies also will help their management teams focus on realizing the full potential of the respective businesses.”

He added that in today’s world, there is less need to own content and distribution assets. After all, cable has become more of a telecom business with the addition of telephony and broadband services, meaning that cable systems “don’t fit that well into a content company.” Plus, Bewkes said he feels TW’s content assets are “very established, very strong” and get access to many distribution platforms in the digital age.

What the TW content giant will do with the extra cash from the dividend was one initial focus of discussion Wednesday on Wall Street.

Miller Tabak analyst David Joyce ranked the likely priorities like this: “Stock buybacks, and then any opportunistic online or cable network acquisitions that may come along.”

Morris argues that “returning the cash to shareholders via a dividend and/or modest investments in existing content assets would be the best use” for the additional capital. TW currently pays a quarterly cash dividend of only 6.25 cents, making for a 1.5% yield that analysts have long argued could increase over time.

“There are several potential acquisition targets that the new Time Warner might be interested in, including the Weather Channel (which is currently being auctioned off), Scripps Networks Interactive or Discovery,” Sanford Bernstein analyst Michael Nathanson said.

Alternatively, paying down debt could boost TW’s 2009 earnings per share by up to 8%, and more stock repurchases could boost the bottom line by up to 11%, he estimated.

While not showing his cards, Bewkes again signaled interest in cable networks. When asked about networks acquisitions, he said: “That’s a good area for us.”
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