IP Democracy: Time Warner Unveils Cable Separation Deal

Media giant Time Warner unveiled its plan for getting out of the cable business this morning through a complex transaction that will give the parent company $9.25 billion in cash from a special dividend that Time Warner Cable will pay its shareholders. At the same time, Time Warner will be getting rid of TWC's $13 billion debt and in the process slashing its own debt load by a third.

With its new-found financial flexibility, Time Warner will be in a better position to rev up what will be its pure-play content business. During a conference call, Time Warner CEO Jeff Bewkes said that the company will use its windfall and flexibility to "make disciplined acquisitions and further investments in our business."

The obvious source of expansion for Time Warner is AOL and the highest-profile opportunity for AOL is its much-discussed deal with troubled Yahoo. But Bewkes wouldn't comment on that prospect. "We can’t talk about what opportunities might exist for us…with the usual suspects who are currently trying to decide how they are going to configure themselves," he said in a clear reference to Yahoo.

Time Warner Cable, on the other hand, will emerge from the separation with a lot more debt. That company plans to float the $10.8 billion stockholder dividend through a new $9 billion bridge loan backed by a two-year $3.5 billion loan from Time Warner in the event it can't convert the bridge loan into longer term debt.

Although it seems like TWC might be getting the short end of the stick, credit ratings agency Fitch doesn't see it that way. Fitch maintained its BBB rating on TWC and said that the company's strong free cash flow generation should keep it stable even with the increased debt load.

During the call, Bewkes offered an historical backdrop for why Time Warner no longer needs its cash-generating cable business. Back in the 80s and 90s, when cable was almost purely a video business, Time Warner needed the guaranteed outlet that cable systems provided and the synergies between content and conduit were strong.

Now, however, cable is "really a full-fledged telecommunications business" and its needs don't fit as well with a content company, Bewkes said. Likewise, Time Warner's content brands don't need cable as much as they once did. "At this point our content brands are very established, very strong, don’t need to the extent…that they did earlier an ownership link with cable."

Posted by Cynthia Brumfield on May 21, 2008 11:11 AM to IP Democracy