Icahn Puts the Heat on Parsons

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Time Warner Inc. chairman and CEO Richard Parsons met with corporate raider Carl Icahn last week. And though the meeting produced no fireworks, some analysts believe that the media giant should take Icahn’s overtures seriously.

Icahn revealed Aug. 15 that he and three other hedge funds — Franklin Mutual Advisors, Jana Partners and S.A.C. Capital Advisors — have accumulated a $2.2 billion stake in Time Warner (about 2.6% of outstanding shares). That’s a minuscule part of Time Warner’s public float (about 4.6 billion shares), but Icahn has made a career in buying stakes in public companies and pushing for change.

WANTS $20B BUYBACK

This time, Icahn and his group want Time Warner to fully spin off its cable assets and quadruple a current $5 billion share-repurchase program.

“It was a frank and open exchange of views,” Time Warner spokeswoman Mia Carbonell said of the Aug. 17 get-together. “Dick reinforced to Carl Icahn that the board and management are committed to moving as aggressively as appropriate on the current course the company is on to create and deliver long-term value for shareholders.”

Icahn, in a statement on Aug. 18, called the meeting productive and said the two plan to meet again.

“At the end of the meeting, we both observed that we had, at the very least, one thing in common: We both believed Time Warner was meaningfully undervalued and that we both wanted very much to rectify this situation,” Icahn said in a statement. “We agreed to communicate again shortly.”

Icahn appears to be trying to push Time Warner in the direction of Viacom Inc., which is moving forward with plans to split its operations in two separate publicly traded companies — one consisting of its cable and film assets, the other its broadcast television and radio properties — in an effort to goose its stagnant stock price.

In an interview with CNBC earlier this month, Parsons said he didn’t believe such a move would be right for Time Warner.

“It doesn’t seem to me that any of those sort of spiffy moves have created an awful lot of value in the short term,” Parsons told CNBC’s David Faber. “But we’re driving this company for the long term. We are trying to create value for the long term.”

While several analysts have said that Icahn has little chance of affecting change at Time Warner, Fulcrum Global Partners analyst Richard Greenfield said Icahn’s suggestions are not that far off the mark.

Icahn’s moves come at a time when media stocks have been on the decline. Despite moves by Parsons to right what was once a faltering ship — he successfully reduced debt by more than half to $13 billion and settled SEC and shareholder litigation connected with accounting problems at America Online, to name a few moves — Time Warner’s stock is still down 6.2% this year.

Greenfield has been a vocal opponent of Time Warner’s plans to spin off 15% of Time Warner Cable — called a “stub” — after it completes its merger with Adelphia Communications Corp. early next year. Time Warner has publicly said the spinoff structure offers the greatest flexibility.

The cable unit has been one of Time Warner’s best performers — its $8.5 billion in revenue in 2004 represented 20% of the company’s overall sales and its $3.3 billion in operating income before depreciation and amortization that year was more than any other Time Warner unit.

Greenfield doesn’t agree Time Warner would be hurt by unloading the cable division and sees a contradiction. “If Time Warner 'loves’ the cable business, as its public spin has appeared to indicate, why not buy Adelphia for cash?” Greenfield asked rhetorically in a research note to clients.

“Time Warner is underleveraged, even with the publicly announced $5 billion share buyback,” Greenfield said. “The reason in our mind is clear: Time Warner plans to own less over time. Therefore, why not deconsolidate distribution (and its higher capital-expenditure needs) as soon as possible, whether that means owning a stake less than 50% (akin to News Corp.’s 34% interest in DirecTV Inc. and British Sky Broadcasting plc) or splitting off Time Warner Cable in its entirety.”

POOR FORECAST FOR STUB

Greenfield also says the cable stub will trade poorly because most of that equity will end up in the hands of debt holders, who are likely to monetize their Time Warner Cable stakes and put pressure on the share price. Also, with only 15% in public hands, the shares are likely to trade at a discount to other large pure-play cable operators like Comcast.

In an interview, Greenfield said Time Warner would be better off by separating the cable unit completely, simplifying its balance sheet and taking on more debt. “They may not go all the way, but I think they will be pressured by shareholders” to reconsider some of their current initiatives, he said.

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