Time Warner Open to Cable Stake Sale

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With an initial public offering of its cable operations slated for next year, Time Warner Inc. chief operating officer Jeff Bewkes said last week the media giant wants to grow its cable footprint — even at the expense of reducing its ownership in Time Warner Cable below 50%.

At the UBS Global Media & Entertainment conference in New York Wednesday (Dec. 6), Bewkes said holding a minority position in the cable unit is not out of the question.

“We don’t have a need or a firm policy that says we have to have 50-plus percent of our cable company,” Bewkes said. “What we care about in our cable company is that it is optimally competitive and the most economically efficient and would drive the highest returns.

“We don’t care what percentage we own, we just care about getting the highest returns,” he added.

Bewkes said reducing that ownership would not happen in 2007. In October, Time Warner Cable filed documents that prepare for its stock to be traded publicly, with about 16% of the company going to creditors of Adelphia Communications and the remaining 84% staying with Time Warner Inc. The initial public offering stems from Time Warner Inc.’s joint purchase of Adelphia in July with Comcast.

As part of the $17.6 billion deal, Time Warner agreed to include a 16% interest in its cable unit.

Time Warner Cable is the second-largest cable company in the country, with about 13.5 million subscribers. And its systems account for more than 40% of Time Warner Inc.’s total cash flow of $7.8 billion a year.

Time Warner Inc. might consider reducing its stake in the cable operations — if it helped the business get larger.

“Judiciously, we would [like to get bigger], but we want to do it with a good return,” Bewkes said. “One advantage — and this is real speculation — is we have been living through a period of fairly lax government regulation on what they used to be worried about, like the old 30% cap on cable territory. It may be, depending on what consolidation comes on offer, that Comcast couldn’t do it, which is good for us and helps the pricing aspect of whatever theoretically that might be.”

Time Warner Cable stock could be used as a deal currency that would help it buy other cable systems, Pali Research analyst Richard Greenfield said.

“Time Warner Cable is not going to make non-cable acquisitions, because that would directly conflict with what the parent company Time Warner is currently doing,” Greenfield said.

Greenfield said first in line would be Cablevision Systems, long a target of Time Warner Cable. The two are the major operators in the largest cable market in the country, New York. Also in line could possibly be Charter Communications systems in Dallas-Fort Worth and Los Angeles.

Greenfield noted that none of these possible deals is imminent. Time Warner would have to wait at least 12 months until after the cable stock is issued to reduce its stake.

“This is a 2008 conversation,” Greenfield said. “But what it means to me is that they will be sellers of Time Warner Cable stock in the future.”

Selling a portion of its cable stake could be a way for Time Warner Inc. to acquire assets, such as an Internet portal like Yahoo; or, bring in cash from another media giant that wants to buy into cable. News Corp., for instance, is close to unloading its only video distribution asset, DirecTV Group, to Liberty Media. But Greenfield said that is not a likely scenario.

Dipping below the 50% ownership mark would mean that Time Warner Inc. could no longer consolidate the cable unit’s cash flow on its balance sheet. While that would mean a big hit to the parent — cable accounted for $3.7 billion in operating income before depreciation and amortization in 2005 and $2.9 billion in the first nine months of 2006 — Greenfield said it would be in line with corporate strategy.

“[Time Warner chairman and CEO] Dick [Parsons] has said on record that both [Time Warner Inc. and Time Warner Cable] need to have separate, independent balance sheets,” Greenfield said. “They’ve started the process. If they want to complete the process, they have to fully separate it over time.”

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