Time Warner Going North for the Winter?
Wednesday, February 14, 2007 | Wayne Mulligan
Happy Valentine's Day!
And while I didn't have time to send you flowers this year, I did make some time to read some of the questions other Tycoon Report readers have been sending in.
You might’ve been reading a lot about Time Warner Cable (Pink Sheets: TWCAV) and its recent happenings in the papers this week.
Some Tycoon Report readers have written in and said they’re a bit confused on a few points, namely:
1. Why all the “hub-bub” over a spin-off?
2. How does Adelphia fit in?
3. What does this mean for Time Warner (NYSE: TWX) shareholders?
These are all great questions, and I’m going to go over each of them for you today.
The first and the second questions tie into one another, so I’ll knock both of those out at once…
1. Why all the “hub-bub” over a spin-off, and how does Adelphia fit in?
Well, there are a few reasons why this is such a big deal.
First off, you need to know a bit about Adelphia Communications before you can understand where Time Warner fits in.
Adelphia was the telecom giant that declared bankruptcy protection back in 2002 due to the fraudulent activities of the founding Rigas family.
Since then, the company has been negotiating with potential asset acquirers and its creditors, eventually selling off its cable assets to Time Warner and Comcast (Nasdaq: CMCSA).
However, some of Adelphia’s creditors didn’t approve Adelphia’s chapter 11 plans and tried to stop the process in court. This forced AOL to file a registration statement with the SEC for plans to IPO 16% of its Time Warner Cable unit.
Many agree a better scenario would’ve had Time Warner compensating Adelphia shareholders and creditors with a cash/stock deal and just using the Adelphia shell to take Time Warner Cable public – as opposed to going through the costly and lengthy IPO process.
Well, after a Federal Appeals court refused the bond holders’ request to deny confirmation of Adelphia’s chapter 11 plans, Time Warner went ahead and pulled their registration statement with the SEC.
Now the media conglomerate is going to distribute 16% of Time Warner Cable stock (along with some cash) to Adelphia’s shareholders and creditors (mostly the shareholders) – leaving the other 84% in the hands of Time Warner.
The shares will start trading publicly on the NYSE under the symbol ‘TWC’ as early as March 1st.
And now onto the final question…
3. How does this affect Time Warner?
As you probably know Time Warner’s shares have been stagnant for the last five years. This led to a very public battle between Time Warner and Carl Icahn.
Icahn called for some dramatic changes to Time Warner’s corporate structure in order to reap greater shareholder value – one of the changes he demanded/suggested was that Time Warner be split up into four different companies (Cable, Publishing, Film & Television and Internet companies.)
His contention was that the parts were worth more than the whole.
Well, it looks like one of his suggestions has been pushed through – now that Time Warner Cable will be free to trade on the open market, its underlying value might be better realized – especially when you consider how hot cable stocks are right now.
Considering Time Warner still owns 84% of the newly public company and will likely sell off more shares down the road, Time Warner’s stock could see an obvious bump as the cable unit’s stock begins to trade higher.
As of now, Time Warner’s market capitalization is around $83 billion.
Time Warner Cable is currently trading on the Pink Sheets at around a $40 billion market cap.
Once this stock begins to trade on the big board, and mutual funds are allowed to invest, we could easily see the market cap go up by 30%.
Given enough time on the open market, there’s no telling where the stock could trade. This would mean a lot of extra cash as Time Warner begins to sell its shares in the company.
This, combined with the company’s cost-cutting initiatives and its $20 billion share repurchase program, and it’s looking like Time Warner could be a potential “buy” down here at a P/E of 13.
However, the company does have a heavy debt load, and its recent decision to get rid of its internet access business at the AOL unit doesn’t give me the warm and fuzzy I’d need to get involved in the stock right now.
But things can and always do change, so if my opinion on the stock changes, I’ll be sure to let you know…
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Wayne Mulligan
Chief Investment Officer
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