Time Warner’s (TWX) Cable Spin: A Pay-Day For Mr. Bewkes

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Time Warner (TWX) plans to spin-off its cable company, Time Warner Cable (TWC), to shareholders. In the process, the parent will get a payment of $9.25 billion as part of a one-time dividend. It will also let most of its debt go to the cable company, improving the balance sheet by a factor which should matter to shareholders.

According to The Wall Street Journal, “Time Warner could use its windfall to cut its debt further, buy back shares or make an investment.”

Leaving aside the big debt which the cable company will have to handle, well over $23 billion, Time Warner will be left with cash and an odd assortment of businesses.

One of the key legs will be the magazine operations, which are not growing due to movement of advertising dollars out of print. The company will have its cable programming businesses like CNN and Turner. They have done well, and there is no reason to believe that the trend will change. The TWX studio operations run in a cycle, depending, at least to some extent on whether the movies produced do well.

AOL will also stay with TWX. It content business is doing well as it gains visitors and page views. Its ad network business, which had the odd name of Platform A, is in trouble now. Integration of several acquisitions has not worked well. If that can be fixed, AOL will have the largest online ad network in the US, something which should have substantial value, and could lift the company to the upper tier of internet advertising sales

What new CEO Jeff Bewkes has not done, at least yet, is make the case about why he is better off without the cable company. To say it has too much debt is to say that shareholders are getting a bad deal by holding it after the spin-off. Keeping cable means keeping cash-flow. TWC mints money.

The first judgment of the spin-off decision will come from the market’s reaction to the announcement. The second judgment may take some time. Having money in the pocket has often been of no benefit to managements of big companies. One visits to the track, they often back the wrong horse.

Douglas A. McIntyre