Bewkes Reshapes Time Warner

Less than six months on the job as Time Warner Inc. CEO, Jeff Bewkes has more than made his mark on the world’s largest media company.

Since becoming chief executive in January, Bewkes has consolidated his power base, rejiggered some top management positions, consolidated the company’s movie studios and last week found a way to plunk $9.25 billion into the media giant’s coffers through the spinoff of its Time Warner Cable unit.

The TWC spinoff has been expected since February, when Bewkes told analysts on Time Warner’s fourth-quarter earnings call that a split was being considered. Last week, the company revealed just how it intends to do that.

According to the deal, TWC will issue a $10.9 billion cash dividend to its shareholders (about $10.27 per share). As TWC’s largest shareholder, Time Warner will receive about $9.25 billion in cash. In addition, Time Warner will swap its 12.5% interest in a cable subsidiary — TW NY Cable Holding — for 80 million newly issued TWC shares.

Time Warner also will convert its Class-B super-voting shares in TWC (each B share has voting power equivalent to 10 Class-A shares) into Class A stock on a one-for-one basis. Those two transactions will give Time Warner control of about 900 million Time Warner Cable shares, or 85% of TWC’s outstanding stock. Time Warner then plans to distribute all of its TWC stock to Time Warner shareholders. The exact form of distribution will be determined shortly before the closing of the transaction, expected by the end of the fourth quarter.

On a conference call with analysts, Bewkes said the reasoning behind the split is mainly that the businesses — content and distribution — have changed. While Time Warner’s content properties — like HBO and Turner Broadcasting System — may have benefited in their infancies from being connected corporately to a distribution network, that advantage is no longer apparent.

“When Time Warner Cable and all the cable businesses were essentially video businesses, there was more rationale to owning more content and distribution,” Bewkes said. “Now that cable is so much more — it’s gone into voice, data; it’s really a full-fledged telecommunications business — those assets, the need for different initiatives on the cable side, scale, different capital requirements, don’t fit as well with a content company.

“On the content side, at this point our content brands are very strong, very established, and don’t really need an ownership link to one form of distribution, meaning cable.”

Many analysts expected Bewkes to put his own imprint on Time Warner after he was elevated to CEO from chief operating officer this year. Bewkes, who stands to be named chairman by 2009 (it’s in his contract), has made several changes since January, including the consolidation of its boutique movie studio New Line Cinema into Warner Bros., planning to cut 15% (or $50 million) in operating costs from corporate operations and separating its AOL access business and advertising units. The TWC spin also has caused some analysts to speculate that the parent’s AOL online unit and its publishing unit (including magazines Time and People) could be next on the block. However, just when or if those divisions could be sold remains to be seen.

TWC will have to borrow $10.9 billion for the deal, which will increase its total leverage to about $24 billion. But even at that level of debt, TWC will still be considered to be investment-grade by the credit ratings agencies, with a debt-to-cash flow ratio of about 3.7 times 2008 cash flow. TWC expects to be back at about 3 times leverage a year after the deal closes.

The deal frees up Time Warner to use the cash from the deal to pay down debt, buy back more of its own stock, make acquisitions or all three.

Pali Research media analyst Richard Greenfield estimated that after the TWC spin is completed, Time Warner will have about $12.5 billion in debt capacity, while maintaining a leverage ratio of about 2.7 times — well below its target rate of 3 times.

“We have a tough time believing that Time Warner’s management/board will repurchase anywhere near $12.5 billion of stock in 2009,” Greenfield wrote. “We fear they will opportunistically acquire assets to bolster their growth story.”

Just what they could acquire is anyone’s guess. But the transaction could mean that content properties like The Weather Channel — which went on the block in January — are back on the media giant’s radar.

For the most part, analysts and investors looked at the transaction favorably. Time Warner shares rose 9 cents each to $16.24 per share on the day the deal was announced (May 21), while TWC stock was up $1.05 each, to $31.27 per share.