By Frank Ahrens
Washington Post Staff Writer
Thursday, May 1, 2008
Media giant Time Warner will spin off its cable unit, it said during its quarterly earnings call yesterday, formalizing a decision that has been months in the making. Now the future of AOL has moved squarely to the fore.
"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," Time Warner chief executive Jeffrey L. Bewkes said in a statement. "We're working hard on an agreement with Time Warner Cable, which we expect to finalize soon."
Fast-growing Time Warner Cable is the industry's second-largest provider, after Comcast, with more than 14 million U.S. subscribers. The company sells cable television, high-speed Internet and telephone service. 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.
Cable revenue was up 8 percent in the first quarter compared with last year, the company said. Despite the cable unit's success, it has increasingly become a difficult fit within Time Warner, which is still shaking off the crippling 2001 merger with AOL that created a sprawling holding company of unlikely parts.
Cable is a highly capital-intensive business. Time Warner Cable has wanted to invest more of its money into capital improvements and marketing campaigns to fight off growing competition from satellite television companies and Verizon's Fios service.
Instead, much of Time Warner Cable's free cash has been flowing back into its parent company's coffers. After the spinoff, Time Warner Cable can operate independently and Time Warner can concentrate on its content businesses, which include Warner Bros. movie and television studios; Time Inc. publications; HBO and Turner Broadcasting, home of CNN.
The timetable for the spinoff has not been set, Time Warner said yesterday.
Time Warner, the world's second-largest media company behind Rupert Murdoch's News Corp., is worth about $54 billion. Shares of Time Warner dipped 2.75 percent yesterday, closing at $14.85.
Now that Time Warner has announced the cable spinoff, its full attention is turned to deciding the fate of its AOL unit.
AOL has become two increasingly disparate parts -- a diminishing dial-up Internet access business and a growing online advertising arm called Platform A. Time Warner has been talking about a deal with Yahoo, which is fending off an unsolicited offer from Microsoft, about a merger of AOL's ad unit with the popular Yahoo portal. AOL's dial-up unit would not be included in the deal.
But in March, Bewkes told investors that he would consider keeping Platform A and adding to it.
There has been no recent movement on the talks between Time Warner and Yahoo over AOL, according to a source close to the situation who spoke on the condition of anonymity yesterday because the discussions are private.
For the first quarter, Time Warner reported $771 million in profit on $11.4 billion in revenue (21 cents per share), compared with a $1.2 billion profit on $11.1 billion in revenue (30 cents) during the corresponding period a year earlier, a decline of 36 percent but in line with expectations.
Bewkes attributed the drop in profit to declines at AOL and Warner Bros. However, the studio downturn was largely attributable to the one-time, $116 million cost of combining Warner Bros. and New Line studios. Without the cost, Warner's first-quarter earnings would have risen.