To All: The full text of the LA times piece on Cable. Sounds great for us!!
Thursday, October 10, 1996
NEWS ANALYSIS
Next Question for Levin: What About Cable?
News analysis: Many say a spinoff to reduce debt and
bolster Time Warner's stock should be his next move.
By SALLIE HOFMEISTER, Times Staff Writer
Gerald Levin, the chairman of Time Warner Inc., will claim
victory today with shareholders' expected approval of the
company's $6.7-billion purchase of Turner Broadcasting
System Inc. Now the big question is how much and how
quickly Time Warner will reduce its cable holdings.
After the merger closes, within days of the shareholder
vote, the pressure returns on Levin to shave down Time
Warner's enormous debt and pump up its stalled stock price.
Investors have been hounding Levin for years to reduce the
company's cable holdings to achieve that goal and allow it to
home in on its core strength of producing magazines, movies
and TV shows. Though he has staked his career on the
expansion of cable, Levin finally appears ready to oblige, and
Time Warner's new vice chairman, Ted Turner, the founder of
Turner Broadcasting, is actually enthusiastic about the idea,
according to shareholders who attended meetings over the last
week held by the company to promote the merger.
The Levin-Turner team told analysts Wednesday that they
will halve Time Warner's $17 billion in debt. The fastest route
would be to spin off control of cable, which Levin recently said
for the first time he would consider doing.
"Jerry can declare victory in Vietnam and move out of
cable," said Mario Gabelli, whose investment funds own Time
Warner shares. "Now that he has Turner, he doesn't need
cable as much, and he wouldn't have won Turner without
owning cable systems, so he has proven his strategy was
correct."
(Time Warner joined with other cable operators to rescue
Turner from near-bankruptcy in the late 1980s. The rescue
made Time Warner one of the largest shareholders and put the
company in a prime position to buy Turner.)
Cable infrastructure operations are seen by Wall Street as
draining capital away from other parts of Time Warner that
may be more promising, including its new family of cable
networks such as CNN, TBS and TNT. Though cable
operations throw off lots of cash, their profits are meager
because of the huge capital investment. New services such as
telephone service require further investment.
"Time Warner recognizes they can get a higher return from
putting the Cartoon Network in France than from upgrading
100 miles of cable fiber in Akron, Ohio," said Christopher
Dixon, an analyst at PaineWebber Inc.
Cable stocks have been weak because Wall Street is
increasingly skeptical after years of undelivered promises.
Many analysts question the ability of cable operators to protect
their turf in the new deregulated communications marketplace.
"I can't see putting more money in the ground when their
previous investments in fiber still haven't paid off," said Richard
Rubinstein, who holds Time Warner shares in the portfolio he
manages at Oppenheimer Management Corp.
Even Time Warner is starting to have second thoughts
about the telephone business, despite Levin's dream of sending
voice, video and data to homes via cable. Company executives
recently acknowledged that developing the telephone business
may take far longer than projected.
Similarly, while the company two years ago was gung-ho
about its interactive television experiment in Orlando, Fla., for
shopping, playing video games and finding various information
over cable, Time Warner executives now say the technology is
most effective in delivering movies on demand, a much
narrower business.
Meanwhile, as Time Warner poured money into cable
expansion, it largely missed out on what analysts say is now the
fastest-growing segment of the entertainment industry: the
channels carried on those systems. Digital technologies are
expanding channel choices worldwide.
But the company lacks the resources simultaneously to pay
down debt, upgrade its cable systems and use Turner's
expertise to create a host of new channels using such assets as
the Sports Illustrated, Money and People magazines.
Many shareholders expect Time Warner to give up control
of cable to its partner US West in exchange for full ownership
of HBO and Warner Bros. The regional phone company owns
about 25% of a partnership that holds most cable holdings,
Warner Bros. and HBO.
Levin promised Wall Street in early 1995 he would
restructure the partnership to make it easier to assess the
company's financial value, but negotiations with US West
crumbled last year over issues of price and control.
US West's strategy is to become a top-ranked cable
operator. Early this week, the phone company said it would
complete its $11.3-billion purchase of Continental Cablevision
in November, clearing the decks for a return to the bargaining
table with Time Warner.
PaineWebber's Dixon says Time Warner could spin off its
cable holdings, along with $8 billion in debt, into a new
partnership that would generate enough cash, roughly $2
billion, to make interest payments. Whether US West Media
controls the partnership depends on the value placed on its
25% of HBO and Warner Bros.
Levin may resist giving up control because of his long
attachment to cable, which he described at a recent luncheon
with journalists as being "in my soul." Under his leadership,
Time Warner's cable holdings have grown by more than 50%.
As a result, Gabelli predicts that the partners could arrange
a swap under which Time Warner keeps control of a few key
cable clusters, including New York's system, which is the
country's largest at1 million subscribers. Or, he said, both
companies could merge their cable interests into a new publicly
traded company.
One investment banker said Time Warner could proceed
without US West by selling off the 2 million cable subscribers it
owns outside the partnership. Such a sale could pay down
debt and buy Time Warner leverage in its negotiations with the
phone company, which says it has no incentive to give up the
entertainment assets.
Some analysts believe a cable and debt reduction plan
could lift the stock price above $60 a share. The stock has
moved up briskly in recent weeks on that hope, rising to
$41.125 on Wednesday.
Copyright Los Angeles Times
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