Time Warner Profit Warning Prompts Sell-Off

Media giant Time Warner Inc. warned Monday that earnings growth for the year would fall short of expectations. The announcement caused the company’s shares--and those of its merger partner America Online Inc.--to drop more than 13%.

New York-based Time Warner told investors that disappointing box office results, weaker music sales and an industrywide slowdown in cable advertising have cut into this year’s profits more deeply than anticipated. Rather than growing by 12% to 13% as predicted, earnings for the year will rise by 11%, the company said.

Time Warner officials laid much of the blame on the poor performance of “Little Nicky,” the Adam Sandler film that has grossed only a fraction of his past hits.

The disclosure comes less than a week after investors celebrated the long-awaited approval by the Federal Trade Commission of the AOL-Time Warner merger. Monday’s stock sell-off shaved an additional $14 billion off the value of that deal, now estimated at $89 billion. When it was announced Jan. 10, the all-stock deal was worth $163 billion.

“People are resetting their calculations as to the value of the combined companies,” said Rob Martin, analyst at investment bank Friedman, Billings, Ramsey & Co.

Time Warner shares fell $9.47 Monday to close at $63.25. AOL shares closed at $42.24, down $6.72. Both companies are traded on the New York Stock Exchange.

A Time Warner spokesman stressed that post-merger earnings projections for the combined companies remain unchanged. In addition, AOL, based in Dulles, Va., affirmed that its business units are on track to report record growth in the fourth quarter and that its advertising and e-commerce revenue remain in line with Wall Street expectations.

But concerns about a slowdown in Internet advertising have already depressed AOL shares, which have lost about one-third of their value this year.

Martin attributed both companies’ problems to a slowing economy but predicted that the merger will enable them to fare better in a recession, thanks to a more diversified advertising base.

Nevertheless, the earnings slow-down will increase pressure on Time Warner and AOL to quickly demonstrate the synergies of their merger, increasing the likelihood of job cuts, analysts say.

Already, anxiety is high at the companies’ headquarters offices in New York and Dulles. Workers at Time Warner cable news channel CNN also are bracing for layoffs. A Time Warner spokesman declined to comment on possible job cuts.

The merger, which awaits approval by the Federal Communications Commission, is expected to close by January.

Separately Monday, Time Warner said it has spent $570 million to buy out its partners in the broadband Internet service provider Road Runner, a joint venture with AT&T; Corp., Microsoft Corp. and Compaq Computer Corp.

The deal allows Time Warner to terminate its contract early with Road Runner, which has been the exclusive provider of high-speed Internet access on Time Warner’s cable lines. Under the terms of last week’s FTC agreement, AOL Time Warner promised to begin leasing its cable lines to rival Internet service providers, such as EarthLink Inc.

The Road Runner restructuring also fulfills a pledge by AT&T;, made during its acquisition of Media One Group, that it would divest its 25% stake in the ISP. Microsoft and Compaq each owned a 10% stake.

Time Warner plans to continue offering Road Runner service as a separate Internet brand, potentially in competition with AOL.

As part of the restructuring, Time Warner would take a one-time, fourth-quarter charge of $20 million to $40 million.