TWC May Be On Path to Spinoff

9/21/2007 8:00 PM Eastern

Time Warner Cable is evaluating a request from parent Time Warner Inc. to buy out its stake in a New York cable partnership, a move that some analysts believe could be the first step in spinning off the cable unit completely.

The New York-based cable operator said last week in a Securities and Exchange Commission filing that it appointed a special committee of independent directors to evaluate a proposal from its parent to sell back “a significant portion” of its 12.4% non-voting interest in TW NY Holding. TW NY Holding is the primary asset held by Time Warner Cable.

Selling its interest in TW NY Holding would not affect Time Warner Inc.'s overall economic stake in Time Warner Cable, which would remain at 84%, according to the filing. However, it appears to be a sign that the parent company, which has denied any interest in selling off or significantly reducing its interest in the cable company, may be having a change of heart.

Time Warner Cable valued the full 12.4% stake at about $2.9 billion. But given that the cable company has low leverage — its debt-to-cash-flow ratio is about 2.4 times — and is expected to have significant free cash flow, most analysts viewed using that financial firepower to simplify its structure as a good move.

“Such a transaction, were it to be completed, would have the effect of reducing [Time Warner Inc.'s] effective ownership of Time Warner Cable, and thereby anti-diluting TWC's public shareholders,” Sanford Bernstein cable and satellite analyst Craig Moffett said in research note. “It would also have the effect of increasing TWC's debt and thereby lowering its cost of capital. And it would significantly streamline, and simplify, what is today an overly complex cascading tiered-ownership structure.”

Banc of America Securities media analyst Jonathan Jacoby was more blunt.

“We view this as a potential 'sign' that the company is on the path to the eventual separation of [Time Warner Cable] from [Time Warner Inc.],” Jacoby wrote in a research note.

Time Warner Inc. chairman and CEO Richard Parsons fueled that speculation in his comments at the Goldman Sachs Communacopia conference in New York last Tuesday. During the conference, Parsons said that while he doesn't expect to reduce the stake anytime soon, it is being evaluated by the company.

“I believe that given where our cable company is likely to go in the fullness of time, there will be a point in time when it's going to need to be on its own,” Parsons said at the conference.

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