Cable split could slow growth

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

After the separation of Time Warner Cable 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 TW Cable under a deal unveiled Wednesday will lower the growth rate of the remaining assets given that it 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 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 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 TW Cable) 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, TW Cable, run by Glenn Britt, 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 TW Cable share, well above the $6 estimates of some analysts.

In the end, TW will distribute its stake in TW Cable to stockholders in a tax-efficient manner that will 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."

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