Time Warner finalizing cable unit spinoff

Will boost firm's focus on producing, marketing content

NEW YORK -- A greater focus on content businesses and a bigger cash war chest are two key effects of Time Warner's spinoff of Time Warner Cable that is set to be completed late Friday.

Management already has provided some glimpses at how it will handle both.

On the cash front, Time Warner received $9.25 billion this month as part of the Time Warner Cable separation; it quickly moved to pay down $2 billion in debt amid the continuing credit crunch. A few days ago, it agreed to spend $241.5 million to take a stake of about 31% in broadcaster Central European Media Enterprises, whose market value has declined amid the recession and financial crisis.

Timer Warner is likely to use the remaining cash in similar ways to improve its balance sheet, as well as make targeted acquisitions in its core businesses that boost its global reach and finances. Plus, analysts expect Time Warner will make good on promises to return more money to shareholders either through stock buybacks or a dividend increase.

The spinoff also boosts Time Warner's focus on the core competency of producing and marketing content.

The financial fallout: A reduction in revenue and operating income before depreciation and amortization by taking away the cable systems' sizable contributions, plus increased exposure to economy-affected advertising revenue and potential film or other flops in the inherently hit-and-miss content businesses.

"TW is less diversified now, and not only is it more relatively exposed to advertising and the potential boom-n-bust flop nature of films, they don't have as much of the recurring monthly subscription revenue that had been coming from TW Cable, which used to smooth earnings out," Miller Tabak analyst David Joyce said. "The good thing is there is still substantial diversification."

In 2008, on a pro forma basis, Joyce said the new Time Warner's content revenue made up 37% of total revenue, subscriptions contributed 34% and advertising pitched in 26%.

"I think they'll continue to add to cable networks domestically and internationally to add a monthly affiliate/carriage fee to the mix," Joyce said.

Chairman and CEO Jeffrey Bewkes has argued that content operations will grow faster in the coming years than many analysts dare believe. He pointed to the need to fully nurture and manage hits in addition to cutting costs -- like merging New Line into Warner Bros. -- to set up the company for higher returns and profits.



Indeed, management already has shown a commitment to giving tentpole films and hit TV shows full attention to invest in, promote and milk as much as possible.

Cases in point: the "Sex and the City" film based on the HBO series, which already has led to plans for a sequel, and "The Dark Knight," which saw Time Warner's Warner Bros. add 3 a.m. screenings to still-strong boxoffice demand and ended up with the second-highest boxoffice haul to date.

Although hits or misses rarely have a major stock impact at the conglomerates, Goldman Sachs analyst Mark Wienkes suggested this week that in the current market things could be different.

"With sober 2009 earnings-per-share estimate revisions of about 40%, a still depressed but stable ad market, widespread cost-cutting plans and limited visibility, we think content success will garner greater importance as a near-term driver of stock performance," he said in a report.

Bewkes also has talked about Time Warner's need for content success and continued scale to attract the best creative talent, such as Christopher Nolan, David Chase, Alan Ball and Will Ferrell.

In the digital age, Time Warner's increased pure-play content focus also has meant that the company is more aggressively pushing its content across new platforms. Examples include a recently unveiled "made-to-order" DVD service for old movies and its "TV Everywhere" initiative that calls for more cable-network content to go online in return for requiring consumers to pay a TV subscription through a cable, satellite or telecom provider.

Some on Wall Street predict that Bewkes could decide on a spinoff of AOL in the coming year to complete the transformation into a pure content powerhouse.

"Jettisoning the perennially declining AOL would materially improve the growth profile" of Time Warner, Sanford C. Bernstein analyst Michael Nathanson said recently.

By his estimates, Time Warner's 2008-12 compound annual growth in operating cash flow would increase from 2.5% to 7.1% if AOL goes the way of Time Warner Cable.

Time Warner and Time Warner Cable shares begin trading Monday on a full post-spin basis.
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