News

Time Warner Plans IPO for Its Phone Unit

4/12/1998 8:00 PM Eastern

New York -- A second cable MSO plans to test public
investors' appetites for shares in its business-telephone unit.

Time Warner Inc. and its partners in Time Warner
Entertainment, U S West Inc. and Advance/Newhouse Partnership filed a registration
statement on April 3 to sell a minority of what they call Time Warner Telecom Inc. to the
public through an initial stock offering (IPO). The filing didn't reveal how big a
piece of the phone business would be sold or at what price, and a Time Warner spokesman
would not elaborate.

The move follows by two weeks Adelphia Communications
Corp.'s registration for an IPO for its Hyperion Telecommunications unit. Like Time
Warner and its phone unit, Adelphia plans to retain control of Hyperion, of which it now
owns 79 percent on a fully diluted basis.

After accounting for IPO expenses and the possible sale of
an over-allotment of stock, Adelphia hopes to take in about $150 million from the stock
sale. Adelphia tried to take Hyperion public in 1996 but abandoned the effort, citing poor
market conditions.

Over the years, several MSOs have built sizeable businesses
that now are considered competitive local-exchange carriers, or CLECs. The start-ups were
seen as an efficient way to wring incremental revenue out of fiber that was needed for the
cable system, and a foundation for possible cable telephony services later.

Until recently, though, the MSO stocks haven't gotten
much credit for their phone assets.

The biggest cable CLEC is Teleport Communications Group,
which its owners, including Tele-Communications Inc., Comcast Corp. and Cox Communications
Inc., have agreed to sell to AT&T Corp. for about $2.4 billion in stock.

Cox also has a CLEC unit called FiberNet, which operates in
four cities. Cox officials lately have taken to highlighting FiberNet's results at
investor forums, touting it as about one-fourth the size of Brooks Fiber Properties Inc.,
the CLEC that agreed to merge with WorldCom Inc. last year in a deal that valued Brooks at
$2.9 billion.

Cox vice president for public affairs David Andersen said
the company has never considered a public offering for FiberNet

The Brooks and Teleport deals were among those that fueled
a huge run-up in CLEC stocks over the past year. In 1998 alone, the stocks were up around
40 percent before a recent sell-off knocked that return down to about 33 percent,
according to Bear Stearns & Co. reports.

Cablevision Systems Corp.'s Cablevision Lightpath Inc.
is an established CLEC in Long Island, N.Y., serving some 600 business customers and a
handful of residential subscribers. Wall Street analysts have talked about Lightpath as an
IPO candidate, and one said last week that Cablevision has considered an IPO for the unit,
adding, "Clearly it's a fortuitous time to bring an alternate provider out there."

A Cablevision spokesman declined to comment on that
possibility.

Time Warner Telecom operates in 19 markets, and has
installed switches in 14 of them. As with other CLECs, the Time Warner unit sees the
future in providing a range of switched telephone services while maintaining the
traditional "bypass" service of connecting customers directly with long-distance
carriers. It also intends to delve into new service areas, including long-distance service
and high-speed data transport, according to the filing.

In 1997, switched service accounted for $10.8 million of
the total $55.4 million in revenue at Time Warner Telecom. Total revenue more than doubled
last year, while the unit's operating loss was trimmed to $75.6 million from $82.5
million in 1996. Negative cash flow for 1997 was cut to $37.1 million from $60.2 million
the year before. Capital expenditures are expected to rise to $152.8 million in 1999 from
$147.7 this year.

Time Warner got into the business five years ago with an
aim to provide telephone service as an adjunct to its residential cable business, the
company notes in the offering prospectus.

But for regulatory and business reasons, it decided about a
year ago to focus on business customers. Time Warner's cable telephony business never
branched out from its trial market of Rochester, N.Y., where it still has several thousand
phone customers.

According to the prospectus, Time Warner plans to expand
the CLEC operation into several more markets, mostly where it can lease fiber already
built for the cable company.

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