Time Warner’s Restructures Reignites Interest

Bear Stearns put out an interesting note recently titled “Answers to Key Questions about the TWC Restructuring”. For anyone who has not seen this, it lays out rationale for Time Warner (TWX) to completely spin off its cable holdings as part of its broader restructuring under new CEO, Jeff Bewkes.

Bear Stearns states, “On 2/6/08, TWX announced it has entered into formal discussions with the board of Time Warner Cable to restructure its 84% stake in the latter.” This restructuring is in addition to other efforts already underway realigning its AOL division, and shuttering certain of its redundant film units.

Highlights of the March 18, 2008 note include:

• What is the Strategic Rationale for TWX to Shed Cable? Shedding cable would create a pure play content co., allowing TWX management to increase its focus and reduce its conglomerate discount. TWC can also optimize its capital structure and increase its public float.
• Why Does TWX Want to "Get Rid of" TWC at This (Low) Valuation? We do not think TWX wants to "sell" its TWC stake per se but rather transfer its stake to TWX shareholders directly. This would provide TWX shareholders with more flexibility to either increase or decrease their cable exposure.
• How Does "TWX the Company" Benefit? A spin-off of TWC would not accrue quantifiable benefits to TWX. However, we see the possibility for a 1x special dividend prior to a divestiture (~$4 per TWC share) and/or a split-off structure where as much 40% of TWX's shares could be retired at current prices and assuming the entire 84% stake is split off.
• Will There be Lost Synergies? In a word, "unlikely." We note that regulations limit vertical integration synergies, inter-co. deals are already negotiated arms length, and overly advantageous terms benefit one of the sister units but destroys value at the other.

Interestingly, it should be noted that while they rate TWX as an Outperform, they maintain their rating on the overall Entertainment s Industry as Market Underweight primarily due to “fundamental challenges facing the sector, including concerns that TV usage may be cannibalized by broadband usage” and the “continued shift in ad budgets to online”. In short, they feel TWX is a good stock in a bad sector right now.

I personally have been a long-time bull on TWX though it has left me heart-broken with the missteps and mismanagement of what is arguably the premier collection of media brands worldwide. I sold my long-time position and have been sitting on the sidelines for the past year, though my interest is reignited and will start rebuilding my position soon as I think this company finally has its act together.

Bear puts a $24 price target on the shares as a sum of the parts valuation after all restructuring is done, which would put it just slightly above its most recent highs of $23 where it capped out at back in January 2007. As of the March 18th close, it is now trading at $14.34 which would create significant upside for the patient investor.

Dick Parsons was the right man to stabilize and clean up the awful legal mess that Time Warner became following its disastrous AOL merger. Now his successor, Bewkes, clearly has a much more operational focus and seems to be the right executive to finally move the ball forward here.

The balance of this year should prove bumpy for TWX, but hopefully Bewkes can have much of the restructuring completed to start 2009 off right and build for the future beyond. He is not wasting anytime, it seems, which is great news for anyone long TWX.

Disclaimer: This article reflects the individual views of Mr. Hannan and may not be attributed to any person, company or other entity with whom Mr. Hannan is affiliated.

Disclosure: None

Comments

[J.P. Hannan]

Received an email from a SA reader about this great interview with Dick Parsons. Would advise anyone interested to please check it out-

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