Bewkes May Cut Cable2/08/2008 7:00 PM Eastern
Wall Street was expecting newly minted Time Warner Inc. CEO Jeff Bewkes to rattle some cages when he took the top post in January.
Judging by his first quarterly conference call with analysts last week, he didn’t disappoint.
In the first 10 minutes of the Feb. 6 conference call to discuss fourth quarter results, the new CEO:
Signaled he may merge Time Warner’s New Line Cinema movie studio into Warner Bros. Pictures;
Said he was making moves to cut 15% (or $50 million) in operating costs from corporate operations;
Announced that Time Warner Inc. was initiating conversations with Time Warner Cable’s board of directors to discuss possibly reducing its 84% stake in the cable operator;
Said that a separation of its AOL access business and advertising units would significantly increase the online unit’s strategic options.
None of Bewkes’ revelations came as a total surprise to Wall Street — most analysts were expecting the Time Warner Cable and AOL separations anyway. But Bewkes’ comments, even without detail, indicated change was coming on several fronts.
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“In general, we like the strategic direction laid out by management,” Bear Stearns media analyst Spencer Wang wrote in a research report.
On the cable side, Bewkes said on the call that talks with Time Warner Cable’s board have begun and that a final decision as to what to do with the stake will be made before Time Warner’s first quarter conference call in April. That would coincide with the expiration of restrictions that would increase taxes on the sale of the TWC stake. Those restrictions, which originated with a different Time Warner restructuring five years ago, expire when April arrives.
Bewkes would not tip his hand about his preference for the TWC interest. But the media giant could either sell the entire interest to a third party, or buy in the remaining 16% of the cable unit it doesn’t already own.
Bewkes, who became Time Warner CEO in January, wouldn’t reveal the media giant’s ultimate plans. But he said early on during the conference call that the decision to reduce its stake in the cable company did not signal that the cable business has lost favor with the new CEO.
“Nobody should think that we’ve lost faith in cable’s business prospects,” Bewkes said, but he added that it is not in the best position in its current structure.
Selling or spinning off its TWC stake may not be the most palatable path for Time Warner, given that the cable unit’s stock price, like its peers, has been hit hard in the past year. Since March 2007, stock in the cable company has fallen 37.5%, from $38.93 per share to $24.34 per share on Feb. 7.
On the conference call, Bewkes said Time Warner wouldn’t rule out the possibility of taking the cable company into the parent completely and waiting to spin it out in the future, when cable stock prices are more robust.
“We have said — all of us, both Time Warner’s board and Time Warner Cable’s board — that we believe that [TWC’s] position in the cable industry is undervalued,” Bewkes said. “What we end up doing will depend on the negotiations.”
For the moment, buying in the remaining 16% of Time Warner Cable appears to be the road most analysts believe the company will take.
In a research note, Citigroup media analyst Jason Bazinet wrote that while a tender offer for the remaining TWC stake could depress Time Warner’s equity value by about 20 cents per share, it was worth taking the short-term hit.
“Longer-term, if cable values reappreciate, Time Warner could IPO the cable unit and generate a handsome return with the cash proceeds,” Bazinet wrote. “As such, we’d be willing to take a little near-term pain — of about $0.20 per share — to set Time Warner up for longer-term value creation.”
Pali Research media analyst Richard Greenfield, long a proponent of taking Time Warner Cable in-house, was not satisfied.
In a research note, Greenfield wrote that after listening to the conference call, he was “even more confused about management’s plan for Time Warner Cable. They love cable, believe it’s undervalued, but believe it’s structurally problematic. In turn, they are either going to split the asset off from [Time Warner Inc.] or buy it in. Bewkes wants to simplify [Time Warner Inc.], but also sees cable valuations as depressed; implying to us that [Time Warner Inc.] might actually buy-in [Time Warner Cable].”