Icahn Tries New Tack: Time Warner To Remain Intact

by John Wolfe, Feb 20, 2006, 7:00 AM

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The ongoing battle for control of Time Warner came to an end late Friday when the company reached an agreement with its nemesis, Carl C. Icahn, which effectively ended the gadfly investor's attack on the media conglomerate.

Under the terms of the agreement, the company will remain intact and Icahn will drop his efforts to take control of the board and break Time Warner into four separate units to be sold separately, followed by a stock buyback.

Time Warner issued a statement in which company chairman Richard Parsons said: "We are very pleased to have reached an understanding with Mr. Icahn. We appreciate his role as a significant shareholder, as well as his constructive suggestions. As we've said, our board and management are committed to building value for all of our shareholders."

In the statement, Time Warner also said that it agreed to increase its planned buyback of company shares to $20 billion, from $12.5 billion--and to commit to reduce costs by $1 billion.

Part of Icahn's fight to gain control of the company involved his efforts to appoint hand-picked executives to the company's board of directors. He initially sought to replace the entire 14-person board, but later dropped that number to five.

The New York Times reported that after negotiating with Parsons, Icahn insisted that his group be allowed to choose two board members, but Parsons objected because the group owned only 3.3 percent of Time Warner stock. In the end, Icahn reportedly relented, and agreed that Time Warner would choose two new directors in consultation with Icahn.

The rift between Icahn and Time Warner began several months ago, and culminated Feb. 8 at a packed press conference in a midtown Manhattan hotel, where Icahn and investment banker Bruce Wasserstein charged that Time Warner was mismanaged under Parsons and should be disassembled in order to restore shareholder value. Details of the plan were distributed to analysts, investors, and journalists in a massive report prepared by Wasserstein's company, Lazard, which listed Time Warner's alleged failings and outlined plans for the proposed breakup.

However, in the following days, the plan failed to capture the imagination of the investment community, and the company's stock price remained essentially unchanged.

The reaction on Wall Street was been viewed by observers as a vote of confidence for Parsons and his previously stated desire to keep the conglomerate together. When investors failed to respond, Merrill Lynch issued a report stating that it expected a lack of support for Icahn's plan.

"The outcome does not strike us as particularly surprising, as we did not anticipate significant support for a change in administration," the report said. "The apparently rapid resolution demonstrates the depth of the disconnect between Mr. Icahn and other investors with regard to management performance and the potential for valuation upside in the event (Time Warner) were to be split apart, in our opinion. The valuation implied by Mr. Icahn's group had, in our view, aggressive assumptions for both EBITDA and trading multiples."

In the statement released Friday, Time Warner yielded a little ground to Icahn and his recommendations outlined in the Feb. 8 report, known commonly as the "Lazard Report," regarding the company's cable TV unit.

"The company will continue to review the Lazard Report and will continue its dialogue with Icahn Partners regarding the recommendations in the report," the company said. "Management's view continues to be that a different capital and corporate structure may be appropriate for Time Warner Cable in the future so long as it provides strategic flexibility with the company's content businesses."

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