Time Warner Urged to Sell Cable Units

Accusing Time Warner Inc. of moving too slowly to improve its sluggish share price, billionaire investor Carl Icahn on Monday urged the world’s largest entertainment giant to separate its cable business from its entertainment properties and repurchase $20 billion worth of its stock.

But many investors questioned whether a sale or spinoff of the company’s cable business would improve the entertainment giant’s value. Although they would welcome a bigger stock buyback, analysts said, it’s not the best time to sell or spin off cable systems, which have been trading at historic lows because of concerns about the heated rivalry with phone and satellite TV competitors.

What’s more, analysts remained skeptical that Icahn had the clout to force big changes. Despite some investor frustration with the stock’s stagnation, Time Warner Chief Executive Richard Parsons has won praise on Wall Street for cleaning up the financial and regulatory issues that have shaken the company after its disastrous 2000 merger with America Online.

Time Warner, which owns CNN, HBO, Warner Bros. and the country’s second-largest cable TV provider, said in a statement that the company had “a process in place” to improve shareholder value.

“We would, of course, speak with any interested shareholder who has relevant thoughts or perspectives and in that context we have informed Mr. Icahn that we would be happy to meet with him,” the company said.

Sources close to Time Warner said Parsons and Icahn were scheduled to meet Wednesday.

Time Warner’s size and diverse shareholder base could also present obstacles for Icahn. With a market value of $87 billion, Time Warner has about 4.7 billion shares outstanding.

Icahn said in a statement Monday that he and three other investors had accumulated more than 120 million shares of Time Warner, the equivalent of 2.6% of its stock. Icahn said he would lobby other investors to join forces and that he might consider nominating a board candidate at the company’s annual meeting in February 2007.

Analysts said that although Parsons was unlikely to budge much on Time Warner’s cable strategy, he might be willing to increase the stock buyback to keep Icahn at bay. Many investors were disappointed with a planned $5-billion buyback Time Warner announced this month.

Analysts have been urging Time Warner and most other top media companies to use the strength of their balance sheets to buy back stock as a solution to the slowing growth of their maturing assets. These “equity shrinks” often have the effect of increasing the stock’s price by reducing the supply of shares.

Icahn made a name for himself in the 1980s as a corporate raider, forcing airline TWA into filing for bankruptcy protection and causing a breakup of RJR Nabisco. This year, he’s forced Kerr-McGee Co. to sell assets and drop an expensive acquisition. His proxy fight against Blockbuster Inc. won him three seats on the board.

On Monday, Icahn disclosed that he had amassed a small stake in Morgan Stanley, the world’s largest securities firm.

Analysts said they were still unclear about Icahn’s motives regarding Time Warner.

“There’s more than one way to win,” said Jeffrey Logsdon, an analyst at Harris Nesbitt Corp. He noted that Icahn and his partners had purchased options and were very sophisticated financial players who could “long this and short that.”

Logsdon added: “It’s early in the chess game.”

Time Warner shares rose 26 cents Monday to close at $18.50. They have jumped by about 4% since news of Icahn’s plans first came to light earlier this month, but are still down 5% this year. Before then, the shares were trading slightly above those of the nation’s leading cable provider, Comcast Corp.

Analysts said that, given the lower values of cable stocks, not much would be gained by Time Warner through a sale or spinoff of its cable group. Bear Stearns & Co. concluded that a sale would add only $1.60 to the parent company’s stock price because of a dearth of prospective buyers and cable’s struggles on Wall Street. There also could be formidable tax implications.

Even before Icahn’s recent moves, Time Warner had announced plans to spin off about 15% of its cable company to the public early next year. This was designed to give Time Warner a way to help pay for the proposed $17.6-billion acquisition of Adelphia Communications Corp. with its partner Comcast. It also would provide a means for Comcast to cash out its 21.5% stake in Time Warner Cable.

Parsons has indicated that shares in a new cable company could be used for future acquisitions without hurting the company’s core content business. Time Warner has long sought to consolidate its position in the New York cable market by buying its largest local rival, Cablevision Systems Corp.

Time Warner’s stake in the cable subsidiary would decrease as it used the stock to expand its cable presence and venture into new areas, such as wireless communications.

Analysts said Time Warner also might resist giving up control of its cable systems so it would not be at the mercy of other operators who could influence the pricing and future of its cable channels, including CNN, TBS, TNT and Cartoon Network. “You maximize the benefit of creating and owning content if you also own the distribution networks,” Logsdon said.

Time Warner, moreover, has used its cable distribution as leverage in negotiations with other large media giants such as News Corp., which owns the leading satellite TV provider and a collection of cable channels.

Merrill Lynch analyst Jessica Reif Cohen said the company would be reluctant to lop off Time Warner Cable because it had just reassigned some top executives to run it.

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Profit pipeline

Cable is one of Time Warner’s more profitable divisions, accounting for more than a fourth of its operating profit in the second quarter.

Breakdown by second-quarter sales and operating profit

Sales

Filmed entertainment: 24%

Networks: 22%

Cable: 21%

AOL: 19%

Publishing: 14%

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Operating income

Networks: 30%

Cable 27%

AOL 20%

Publishing 16%

Filmed entertainment: 7%

Source: Bloomberg News