Icahn Rumor Drives Time Warner

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Time Warner Inc. stock was up 5.6% (99 cents per share) between Aug. 4-9, fueled by speculation that corporate raider Carl Icahn is accumulating a stake in the media giant and pressing for a breakup.

Rumors that Icahn was increasing his stake in Time Warner first surfaced last Friday, and the stock rose 3% (54 cents) on Aug. 5 to $18.09 per share. When published reports Wednesday said that Icahn was talking to several hedge funds to launch a possible proxy fight against the company, shares continued to rise, closing at $18.54 on Aug. 9.

According to Securities & Exchange Commission documents, Icahn owned about 5.1 million shares of Time Warner stock, worth about $88.7 million as of May 13. The corporate raider has since increased his holdings to about $100 million, several published reports said Wednesday.

According to those reports, Icahn is maneuvering to gain a board seat and could try to force the media giant to divest assets — either its cable operations and/or its publishing unit — or cajole the company into increasing its $5 billion stock repurchase program.

Icahn is no stranger to proxy fights. Earlier this year he accumulated a large equity stake in Blockbuster Inc., criticizing the video retailer’s management and calling for changes. That hasn’t worked out as well as other Icahn proxy plays — Blockbuster stock is down since he began accumulating shares and it reported disappointing second quarter financial results last week.

But other similar attempts by Icahn have been wildly successful: He reportedly made a $700 million profit in a similar attempt against oil giant Texaco in the late 1980s and netted $800 million when RJR Nabisco separated its food and tobacco units in the 1990s, after Icahn urged it to do so.

In a research report, Merrill Lynch & Co. media analyst Jessica Reif Cohen wrote that Icahn’s track record attracts investors, but she warned that “following Mr. Icahn is not an infallible road to riches.” His Blockbuster and ImClone investments are both down, she noted.

Reif Cohen wrote that there could be two possible scenarios regarding the Icahn investment in Time Warner: selling down operating assets (publishing, cable or America Online) or increasing leverage.

“We believe that investors would be most likely to support a split that created a structure like the new Viacom post-split (e.g., studio and networks), but we believe that isolated spinoffs of either AOL or [Time Warner] Cable would not be as favorably received,” Reif Cohen wrote. “Any of these plans would likely meet with stiff resistance from management, which has a positive relationship with the investment community, in our view. Given this relationship and Time Warner’s size (nearly 5 billion shares outstanding), Mr. Icahn may not be successful in a potential attempt to influence Time Warner management.”

Time Warner stock was down 31 cents each in 4 p.m. trading Wednesday to $18.23 per share.