Time Warner Cable: The Spin Is In


It's official: Time Warner Cable will be spun off from the parent company, Time Warner Inc. CEO Jeff Bewkes announced on Wednesday, although 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. "We’re working hard on an agreement with Time Warner Cable, which we expect to finalize soon. At the same time, we’ll continue to pursue the rest of our aggressive agenda that we believe will deliver increasing value to our shareholders.”

Even after Time Warner decides how to proceed with the spinoff, it could be some time before an independent Time Warner Cable makes significant moves such as acquisitions (see "Ready, Set, Stop").

For example, 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. 

The announcement of the cable split on April 30 is significant because it is the date when restrictions that would increase the taxes on the sale of the TWC stake would expire. Those restrictions, which originated with the restructuring of its Time Warner Entertainment partnership with Comcast five years ago, expire when April ends.

While Time Warner did not announce details of the TWC spinoff, analysts that 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 a later date (when the market for cable stocks improves) to sell or spin off the company.

From a performance perspective, Time Warner Cable sustained a 12% decline in net income during the first quarter to $242 million from $276 million in the prior-year period. Operating income rose 10% to $636 million, from $579 million, as total revenue advanced 8% to reach $4.2 billion from $3.85 billion.

After adding 55,000 basic video subscribers -- its best performance since first quarter 2006 -- Time Warner Cable said it now has 13.3 million of those customers. It also had 261,000 digital-cable net additions in the quarter, pushing its total to 8.28 million.

Residential high-speed customers grew 304,000 to 7.92 million, while the operator added 289,000 phone customers to 3.17 million.

Operating earnings at Time Warner's TV networks group, comprising Turner Broadcasting services and Home Box Office, edged up 1.6% to $874 million from $860 million on a 10% revenue rise to $2.7 billion. Subscription revenue increased 10% owing to higher rates at both Turner and the premium programming leader, while ad revenues gained 13%, according to Time Warner.

Corporately, Time Warner Inc. saw net income drop to $771 million, a total reduced by a $116 million restructuring charge, from $1.2 billion in first quarter 2007, when results were boosted by the absence of discontinued operations and the gain on the sale of AOL’s German access business. 

Backing out those items, Time Warner said its earnings would have been flat for the period. Total revenue edged up 2% to $11.4 billion from $11.2 billion.