Time Warner Considers Spinoffs
No. 2 Cable Firm, AOL Figure in CEO's Planning

By Frank Ahrens
Washington Post Staff Writer
Wednesday, February 6, 2008

Time Warner's new chief executive, Jeffrey L. Bewkes, is preparing to use his first address to investors today to outline plans for shaking up the world's largest media company, starting with an attempt to sell or spin off Time Warner Cable to help reverse the corporation's skidding stock price.

Bewkes also is likely to signal plans to break up AOL in the coming year, as Time Warner holds on to AOL's growing online advertising properties and sells its struggling Internet service provider business, according to a source close to the company who spoke on the condition of anonymity because Bewkes's speech has not been made public.

Bewkes, 55, plans to address investors and analysts this morning as the media giant reports its fourth-quarter and full-year 2007 earnings. Analysts expect the company to slightly beat its 2006 performance.

A Time Warner spokesman declined to comment yesterday.

Fast-growing Time Warner Cable is the industry's second-largest cable system, after Comcast. Time Warner Cable has traded as a public company since last year, but Time Warner continues to hold 84 percent of it. A spinoff would liquidate Time Warner's remaining interest and create a company worth as much as $34 billion, analysts estimate. Time Warner is currently worth about $56 billion.

The Dulles campus of AOL has been hit by two rounds of layoffs in a little more than a year. The unit's original business -- dial-up Internet access -- is becoming obsolete as more customers switch to high-speed broadband service.

Under former AOL chief Jonathan F. Miller and his successor, Randy Falco, AOL is changing into an ad-supported content portal and online advertising business with its Platform A division, which delivers ads to sites such as Facebook. Even as it sheds dial-up employees, AOL continues to strengthen its advertising portfolio; yesterday, it acquired Buy.at, an online marketing company.

In an interview with The Washington Post in October, Falco acknowledged the possibility of an AOL split-up; today, Bewkes is expected to fill in details and set down a timeline.

Potentially complicating an AOL breakup is Microsoft's proposed $44.6 billion takeover of Yahoo, announced Friday, that would create an online advertising behemoth that, though still smaller than Google, would dwarf AOL.

Wall Street has demanded a major shakeup at Time Warner and has been punishing the stock price to get one.

The company's stock traded at $94 a share at the end of 1999, just before Time Warner announced its merger with AOL, creating what was hailed as the first truly 21st-century media and Internet goliath.

The company's stock spiraled downward as the merger floundered and bottomed out at less than $10 a share in July 2002. The stock has made a mild recovery since then but cannot seem to consistently climb above $20 a share.

Time Warner stock has lost 7 percent of its value in the past year. Shares closed down 44 cents yesterday, at $15.40.

Analysts are puzzled by and critical of the slumping stock price, given Time Warner's substantial properties, including Warner Bros. movie and television studios, the New Line film studio, AOL, the 125 titles of the Time Inc. publishing arm, Time Warner Cable and the cable television networks of Turner Broadcasting, including CNN and top-ranked TNT.

If Time Warner were to sell off its non-entertainment properties, such as Time Warner Cable, and concentrate on creating content, Wall Street estimates that its stock would trade closer in value to Viacom's, which closed yesterday at $38.29 a share. In 2006, Viacom split with CBS, which took the entertainment giant's television, radio, outdoor advertising and theme-park properties, leaving Viacom with only cable television and Internet properties, such as MTV and Comedy Central, home of the popular "Daily Show."

There has been talk within Time Warner of folding New Line, producer of the "Lord of the Rings" trilogy, into Warner Bros., but no decision has been made, the source said.

Cable industry executives suggest that Time Warner is more likely to spin off its interest in Time Warner Cable than it would be to sell the majority stake to another firm. With 15 million subscribers, Time Warner trails only Comcast, which has 24 million, nearly 30 percent of all U.S. cable subscribers. The Federal Communications Commission has been considering capping cable ownership at 30 percent, meaning Comcast could not swallow a company the size of Time Warner Cable without exceeding the cap. The third-largest cable company, Cox, is one-third the size of Time Warner Cable.

Bewkes is a veteran of Time Warner's content side. He spent most of the 1990s with HBO, building the premium cable channel into a programming powerhouse, with hits such as "The Sopranos" and "Sex and the City."

He took over Time Warner at the beginning of last month and commenced a company-wide review off all of its business units.

Though Bewkes is well-regarded within the company, some outsiders have questions.

In an analyst's note yesterday, Pali Research's Richard Greenfield referred to Time Warner's "miserable" stock performance and asked why Bewkes's contract stipulates that he can leave the company without penalty if he is not elected chairman, in addition to chief executive, by the first of next year.

"Good corporate governance should imply a separation of the chairman and chief executive roles (ideally with an outsider taking a non-executive chairman's role)," Greenfield wrote.

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