Spinning Off Time Warner Cable

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Time WarnerCable will be spun off from the parent company, Time Warner Inc. CEO Jeff Bewkes made the announcement last week, even if he said the details of the spinoff have yet to be determined.

“We've decided that a complete structural separation of Time Warner Cable, under the right circumstances, is in the best interests of both companies' shareholders,” Bewkes said, in a statement announcing the media company's first-quarter earnings. “We're working hard on an agreement with Time Warner Cable, which we expect to finalize soon.”

Time Warner Cable CEO Glenn Britt, on his company's earnings call with analysts, declined to comment except to confirm that TWC is “working hard” to complete an agreement with its parent.

Citigroup analyst Jason Bazinet, in a research note, said while the spinoff details are unknown, “we think it could prove to be a positive catalyst” for Time Warner Cable stock, particularly if the deal terms include a one-time special dividend.

Even after the parties settle on how to proceed with the spinoff, it could be some time before an independent Time Warner Cable makes any significant moves, such as acquisitions (see “Ready, Set, Stop,” April 14).

For one thing, according to Sanford Bernstein senior analyst Craig Moffett, even a simple spinoff transaction would “trigger a significant number of franchise approval reviews” because of change-of-control provisions in a material number of those agreements.

“Although these kinds of reviews have not traditionally introduced any material risk into the process, they would nevertheless slow down the spin process by six to nine months,” Moffett wrote in an April 17 research note.

Bewkes in February disclosed that the media giant was in talks with Time Warner Cable's board of directors concerning altering its ownership stake.

Time Warner has owned 84% of TWC since it spun part of the company off in July 2006 as part of its acquisition with Comcast of Adelphia Communications.

As of April 30, restrictions that would have increased the taxes on the sale of the TWC stake expired. Those restrictions originated with the restructuring of the Time Warner Entertainment partnership with Comcast five years ago.

While Time Warner did not announce details of the TWC spinoff, analysts who follow both companies have said the company has three options: spinning off its full 84% interest to its shareholders in a tax-free exchange; selling all or part of the 84% interest to a third party; or purchasing the 16% of TWC that it doesn't own and waiting until the market for cable stocks improves to sell or spin off the company.

David Lee Smith, senior analyst at investment site The Motley Fool, said he would be surprised if Time Warner Inc. “indulged in more incrementalism.”

“I think the entire thing will be spun off,” Smith said. “I'd be surprised if it wasn't a clean break.”

Once Time Warner Cable is independent, does a takeover bid for Cablevision Systems grow more likely? “The difficulty is price,” Smith said, noting that the Dolan family failed in its third bid to take Cablevision private last fall.

That said, Smith said such a combination “would really be incredible … It really would allow them to get muscle.”

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