Time Warner Stock Plunges on Word of Rights Offering

Time Warner Inc. said Thursday that it would seek to raise up to $3.5 billion to reduce its debt through an offering of millions of new shares to current stockholders.

But the “rights offering” evoked a ferociously negative reaction on Wall Street. Time Warner’s stock plunged $11.25 a share to close at $99.50 on the New York Stock Exchange. Depending on how many shareholders exercised their rights, each new share would cost between $105, if the offer is fully subscribed, and $63, if only 60% of the rights are exercised.

Analysts said Thursday’s drop in Time Warner’s stock price well below the $105-per-share figure puts the offering in doubt. Time Warner’s stock had been trading around $117 a share before rumors of a stock offering began circulating. Analysts said the offering almost certainly will collapse unless investors are persuaded to bid the market price back up by the time the offering becomes effective later this month.

The offering would boost the number of Time Warner shares by 34.5 million, an increase of 40% over the current 57.8 million shares. The offering places the burden on current shareholders to come up with additional cash to help the company reduce the $11 billion in debt left from Time Inc.’s purchase of Warner Communications.

Although rights offerings--basically calls for additional capital from current shareholders--are common in Europe, they’re extremely rare in the United States. Time Warner, a media and entertainment conglomerate, sought Thursday to persuade shareholders that the novel approach was a good idea because it would improve the company’s balance sheet. The decreased debt load would put it in a stronger bargaining position with big foreign companies with which it has been trying for months to strike deals on strategic alliances involving certain of Time Warner’s entertainment businesses.

And Time Warner argued that the deal was structured so that current shareholders who exercised their right to buy more stock wouldn’t end up with a smaller ownership stake in the company, even though there would be 40% more shares outstanding. Press reports about a rumored stock offering already had sent Time Warner’s stock down $6.25 a share to $110.75 on Wednesday.

But the explanations failed to comfort shareholders. Analysts said Time Warner holders were angered that they would have to put up substantial amounts of cash to retain the same ownership stake. Their holdings will be greatly diluted if they choose not to put up the additional cash. Shareholders also were dubious that their stake in the company won’t be diluted somewhat even if they buy the additional stock.

The analysts said shareholders also had become skeptical about Time Warner’s ability to clinch the deals with big foreign investors.

“This is essentially an enormous equity issuance,” said Jeffrey Russell, a securities analyst at Smith Barney, Harris Upham & Co. He added: “We’ve been hearing about alliances and deals for the last year, and nothing much has happened. People have lost a little of their cool.”

Jay Nelson, a media industry analyst at Brown Bros., Harriman & Co., said shareholders also reacted negatively because they had been led to believe that Time Warner would be able to meet its debt obligations from the merger without issuing more stock.

Time Warner officials declined to comment on the plunge in the stock price or on speculation that the offering may have to be substantially changed or canceled. A preliminary prospectus said the offering would be canceled only if less than 60% of the rights are exercised or if the Dow Jones industrial average drops more than 20% before the offer expires.

Jessica Reif, an analyst at Oppenheimer & Co., said: “The deal can’t be done at today’s (market price) level” for the stock. But she added: “A lot could happen between now and the effective date, and Time Warner will make every effort to get investors to see the merits of this deal.”

The company said three top Time Warner executives--Chairman and Co-Chief Executive Steven J. Ross, President and Co-Chief Executive N. J. Nicholas Jr. and Chief Operating Officer Gerald M. Levin--will exercise all of their rights. Their holdings currently total more than 250,000 shares, the company said.

Under the terms of the offering, the 34.5 million new shares would be distributed in full among however many shareholders exercise their rights. That means that shareholders who decide to exercise the rights would get a better deal if less than 100% of the rights are exercised. Each current share of common stock would get 0.6 of a right to buy one new share. Shareholders also will be allowed to sell their rights.

Depending on how many shareholders participate, Time Warner would raise between $2.1 billion and $3.5 billion from the offering.

Time Warner said June 17 is the earliest the offering could become effective. It first must be approved by the Securities and Exchange Commission. The rights would be offered to anyone holding the stock when the offer becomes effective, which means that investors may still buy Time Warner stock until then and receive the rights.

The company also said its board had authorized a stock split for some time after the rights offering is completed. The company said the split would make the market for Time Warner stock more liquid by making individual shares available at a lower price.

Time Warner reportedly has been negotiating with companies such as Toshiba Corp. of Japan on investments in Time Warner enterprises. Such alliances would provide capital for the businesses to grow, while giving the investing companies a stake. But analysts said that the prospective investors have made steep demands on Time Warner, believing that the company is desperate for capital because of its huge debt. The analysts said a successful rights offering would therefore strengthen Time Warner’s hand at the bargaining table.

The company doesn’t have to begin repaying large portions of the $11 billion in debt until 1993.