Next Question for Levin: What About Cable?

Gerald Levin, the chairman of Time Warner Inc., will claim victory today with shareholders’ expected approval of the company’s $6.7-billion purchase of Turner Broadcasting System Inc. Now the big question is how much and how quickly Time Warner will reduce its cable holdings.

After the merger closes, within days of the shareholder vote, the pressure returns on Levin to shave down Time Warner’s enormous debt and pump up its stalled stock price.

Investors have been hounding Levin for years to reduce the company’s cable holdings to achieve that goal and allow it to home in on its core strength of producing magazines, movies and TV shows. Though he has staked his career on the expansion of cable, Levin finally appears ready to oblige, and Time Warner’s new vice chairman, Ted Turner, the founder of Turner Broadcasting, is actually enthusiastic about the idea, according to shareholders who attended meetings over the last week held by the company to promote the merger.

The Levin-Turner team told analysts Wednesday that they will halve Time Warner’s $17 billion in debt. The fastest route would be to spin off control of cable, which Levin recently said for the first time he would consider doing.

“Jerry can declare victory in Vietnam and move out of cable,” said Mario Gabelli, whose investment funds own Time Warner shares. “Now that he has Turner, he doesn’t need cable as much, and he wouldn’t have won Turner without owning cable systems, so he has proven his strategy was correct.”

(Time Warner joined with other cable operators to rescue Turner from near-bankruptcy in the late 1980s. The rescue made Time Warner one of the largest shareholders and put the company in a prime position to buy Turner.)

Cable infrastructure operations are seen by Wall Street as draining capital away from other parts of Time Warner that may be more promising, including its new family of cable networks such as CNN, TBS and TNT. Though cable operations throw off lots of cash, their profits are meager because of the huge capital investment. New services such as telephone service require further investment.

“Time Warner recognizes they can get a higher return from putting the Cartoon Network in France than from upgrading 100 miles of cable fiber in Akron, Ohio,” said Christopher Dixon, an analyst at PaineWebber Inc.

Cable stocks have been weak because Wall Street is increasingly skeptical after years of undelivered promises. Many analysts question the ability of cable operators to protect their turf in the new deregulated communications marketplace.

“I can’t see putting more money in the ground when their previous investments in fiber still haven’t paid off,” said Richard Rubinstein, who holds Time Warner shares in the portfolio he manages at Oppenheimer Management Corp.

Even Time Warner is starting to have second thoughts about the telephone business, despite Levin’s dream of sending voice, video and data to homes via cable. Company executives recently acknowledged that developing the telephone business may take far longer than projected.

Similarly, while the company two years ago was gung-ho about its interactive television experiment in Orlando, Fla., for shopping, playing video games and finding various information over cable, Time Warner executives now say the technology is most effective in delivering movies on demand, a much narrower business.

Meanwhile, as Time Warner poured money into cable expansion, it largely missed out on what analysts say is now the fastest-growing segment of the entertainment industry: the channels carried on those systems. Digital technologies are expanding channel choices worldwide.

But the company lacks the resources simultaneously to pay down debt, upgrade its cable systems and use Turner’s expertise to create a host of new channels using such assets as the Sports Illustrated, Money and People magazines.

Many shareholders expect Time Warner to give up control of cable to its partner US West in exchange for full ownership of HBO and Warner Bros. The regional phone company owns about 25% of a partnership that holds most cable holdings, Warner Bros. and HBO.

Levin promised Wall Street in early 1995 he would restructure the partnership to make it easier to assess the company’s financial value, but negotiations with US West crumbled last year over issues of price and control.

US West’s strategy is to become a top-ranked cable operator. Early this week, the phone company said it would complete its $11.3-billion purchase of Continental Cablevision in November, clearing the decks for a return to the bargaining table with Time Warner.

PaineWebber’s Dixon says Time Warner could spin off its cable holdings, along with $8 billion in debt, into a new partnership that would generate enough cash, roughly $2 billion, to make interest payments. Whether US West Media controls the partnership depends on the value placed on its 25% of HBO and Warner Bros.

Levin may resist giving up control because of his long attachment to cable, which he described at a recent luncheon with journalists as being “in my soul.” Under his leadership, Time Warner’s cable holdings have grown by more than 50%.

As a result, Gabelli predicts that the partners could arrange a swap under which Time Warner keeps control of a few key cable clusters, including New York’s system, which is the country’s largest at1 million subscribers. Or, he said, both companies could merge their cable interests into a new publicly traded company.

One investment banker said Time Warner could proceed without US West by selling off the 2 million cable subscribers it owns outside the partnership. Such a sale could pay down debt and buy Time Warner leverage in its negotiations with the phone company, which says it has no incentive to give up the entertainment assets.

Some analysts believe a cable and debt reduction plan could lift the stock price above $60 a share. The stock has moved up briskly in recent weeks on that hope, rising to $41.125 on Wednesday.