TW wants to make content cool again

Cable unit's spinoff leaves parent rich, ready

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, set to be completed today.

Management already has provided 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 credit crunch. A few days ago, the company agreed to spend $241.5 million to take a stake of about 31% in broadcaster Central European Media Enterprises, whose market value has declined during the recession and financial crisis.

Time Warner is likely to use the remaining cash in similar ways to improve its balance sheet as well as to 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 through stock buybacks or a dividend increase.

The spinoff also boosts the conglomerate'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 accounted for 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 during the coming years than many analysts dare believe. He has pointed to the need to nurture and manage hits fully in addition to cutting costs — like merging New Line into Warner Bros. — to set up the company for higher returns and profits.

Some on Wall Street predict Bewkes could decide on a spinoff of AOL within a year to complete the transformation into a pure content power. (partialdiff)
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