Time Warner to shed stake in cable unit

Answering Wall Street’s calls for a slimmer and more focused company, Time Warner Inc.’s chief executive said Wednesday that the cable system operator in which it holds a majority stake would become a completely separate entity.

Jeffrey L. Bewkes did not spell out how and when the split-off of Time Warner Cable Inc. would be accomplished.

Bewkes said that he was “very optimistic” about the prospects for the cable business but that “we just believe that the two entities would ultimately be more valuable if separated.” Time Warner owns 84% of Time Warner Cable, a portion of which was spun off into a separate public company that began trading last year.

Spinning off the rest of cable was one of the demands that billionaire investor Carl C. Icahn made two years ago during an unsuccessful bid for control of the company.

Others have since echoed his call, as Time Warner’s stock performance has languished. Last month, the shares sank to a four-year low of $13.65. The stock closed at $14.85 on Wednesday, down 42 cents.

Time Warner, owner of Warner Bros. Studios, America Online, CNN, HBO and magazines such as Time, People and In Style, said its first-quarter profit fell 36% to $771 million, or 21 cents a share, from $1.2 billion, or 30 cents, in 2007.

Results in the year-earlier quarter were boosted by asset sales, particularly a gain on the sale of AOL’s Internet access business in Germany.

Excluding one-time items, Time Warner earned 22 cents a share, the same as a year earlier and roughly in line with analysts’ expectations. Revenue was up 2% to $11.42 billion from $11.18 billion, with the cable, cable TV networks and filmed entertainment segments leading the way.

At AOL, revenue fell 23% to $1.13 billion. The closely watched Internet unit is a year and a half into its transition from a subscriber-based access service to an advertising-driven provider of entertainment, news and networking services. As of March 31, AOL had 8.7 million subscribers, down 647,000 from the end of 2007 and down 3.3 million from 12 months earlier.

The drop in revenue was partly because of the anticipated runoff of subscriber fees but also, Bewkes acknowledged, from poor execution of the integration of several advertising-sales platforms.

Bewkes, whose handling of AOL is under close scrutiny, promised that ad sales efforts would improve and that by the end of June the company would have decided how to split off the access business.

Some analysts have speculated that the Internet access business -- and perhaps the core advertising and content business -- could be sold after the split. AOL also has been in talks with Yahoo Inc. about a collaboration that could help Yahoo dodge a takeover bid by Microsoft Inc.

A bright spot in the quarter was Time Warner’s Cable Networks unit -- CNN, TNT, TBS and HBO -- where revenue grew 10% to $2.7 billion, helped by a 13% year-over-year gain in advertising.

Expenses also rose, partly because of higher programming costs for National Basketball Assn. games on TNT but also because of a $21-million charge for the cancellation of the HBO series “12 Miles of Bad Road.”

Filmed Entertainment saw a 3.5% revenue gain to $2.84 billion, helped by the release of the movies “10,000 BC,” “The Bucket List” and “Fool’s Gold.”

The division took a $116-million charge connected to the restructuring of formerly independent New Line Cinema, which is being folded into Warner Bros.

Bewkes said the restructuring charges would total $140 million but the consolidation would save the company that much annually.

Bewkes also said that Warner Bros. had decided to make movies available for digital video-on-demand rental on the same day that DVDs are released, thus eliminating the window during which new films could be seen at home only via purchase or rental of physical discs.

Video-on-demand profit margins are 60% to 70%, compared with 20% to 30% for physical rental, Bewkes said.

The spinoff of the remainder of cable is meant to “unlock hidden value” within Time Warner, “but I’m not sure how much value is hidden,” said Todd Dagres, a principal of Spark Capital, a Boston investment firm that specializes in media and technology.

He said that although the cable company could eventually wind up with a buyer or strategic partner, it was capable of standing on its own.

Time Warner Cable is the nation’s second-largest cable company, with about 14% of the pay-television market as of the end of 2007, behind Comcast Corp.’s 25.5%, said Robert Serrano, an analyst with research firm SNL Kagan.

Last year, the Federal Communications Commission prohibited any cable company from serving more than 30% of the pay-TV market nationwide, which would prevent Comcast from buying Time Warner Cable.

The market also includes TV services delivered via satellite and phone lines. Satellite provider DirecTV Group Inc. has 17.2% of the pay-TV market, and Dish Network Corp. has 14.1%.

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thomas.mulligan@latimes.com

Times staff writer Jim Puzzanghera contributed to this report.