Commentary

Bewkes' Charge: Get Time Warner Into Digital Shape

Jeff Bewkes will have more than $9 billion in cash from the complete separation of Time Warner Cable later this year--sufficient funds to make the acquisitions and restructuring moves necessary to revitalize the parent company.

Strategic deals to energize its trademark publishing brands, acquiring more cable networks, making smart equity investments and aligning with Internet giants are some speculations from Wall Street.

The willingness of banks to lend Time Warner Cable the $11 billion (through bridge-financing and existing credit facilities) it needs to pay parent Time Warner a $9.25 billion in tax-free dividends is an uncommonly positive sign from the deal-paralyzed financial community. The long-anticipated split is a fiscal work of art: Time Warner forfeits a major cash generator and user (for cable capital improvements), to which it attaches some $35 billion in debt. As a more pure content play, Time Warner will have an estimated $27 billion equity market cap (before debt) after the deal is completed later this year, and $7 billion in debt capacity to do deals, analysts estimate.

A complete separation of Time Warner Cable, in which Time Warner will distribute its entire 84% stake to shareholders, has been an objective since Bewkes transformed HBO into must-see TV. Bewkes may opt for a similar path to revive Time Warner, whose content assets have been underestimated and under-managed in the digital age.

Having financial firepower and a two-thirds reduction in overall debt will enable Bewkes to acquire companies that further TW's interactive and mobile reach. It is baffling that Time Inc. has been unable to better leverage Sports Illustrated, Money, Fortune and Time. Simply transferring print content to the Web has missed the mark. The company has failed to change with the new media tenet. The key one: relevance. The rest: e-commerce, socialization, personalization and management.

Selling Time Inc., as some suggest, would be easy and tragic. How can so much noteworthy content suddenly become so devalued? In part, it lacks a constructive interactive framework. The industry in general has resorted to throwing traditional content into new digital places, and throwing good money after bad, hoping it would magically come together.

AOL's $124 billion acquisition of Time Warner in 2001 was predicated on the notion that traditional media and Internet giants could create something bigger and better. Now Bewkes is confronted with presiding over the breakup or reinvention of Time Warner. He has the opportunity to alter Time Warner's track record of missed opportunities, such as marrying Sports Illustrated) to Disney's ESPN, entertainment (People) to E! Entertainment, online portals (Pathfinder, AOL) to Yahoo, and business news (Fortune, Money, CNN) to GE's CNBC and News Corp.'s Fox Business news.

With the next stage of personalized mobile interactivity at hand, Time Warner and its peers will need to re-engineer themselves into more agile digital shape. The integration of New Line Cinema into Warner Bros. film entertainment operations, the squeezing of another $50 million in corporate costs, and the aggressive infusion of original content and premium rates for contextual advertising at its Turner cable networks will strengthen a streamlined Time Warner. It will help weather the economic downturn with 55% of its 2008 revenues coming from subscriptions, more than 24% from content and only 19% from advertising.

However, future value building will depend on making innovation a company-wide priority--much as Google has made research and development an annual $2.2 billion line item. The financial incentive to reinvent every part of its business will deliver hefty returns. For instance, Money could provide more of an instant price comparison and product information guide for shoppers on the go. Its recently revived Health.com could align with NBC's new wellness video enterprise and InterActiveCorp.'s new Health Central ad network to create a new niche content and ad dynamo.

At the right price, IAC CEO Barry Diller has said he might even take AOL off Time Warner's hands--after a public spinoff of four of its asset groups leaves it with 50% profit growth. Having funds on the uptick of this economic slump could give Time Warner and IAC a competitive edge. The new Time Warner could be interested in acquiring The Weather Channel, Discovery or Scripps Networks Interactive. It could eventually pursue a CBS-CNET news enterprise.

Wall Street first expects Time Warner to solve its AOL puzzle, with or without the help of 5% investor Google. Speculation is that AOL is either in the thick of the Microsoft-Yahoo-Google fracas as a potential strategic partner or will be sold (valued at about $10 billion) to a player that can better leverage its online audience and new ad platform.

Some analyst models call for AOL and the cable networks to average 7% to 8% earnings growth through 2013, and the new Time Warner, sans cable, to generate normalized earnings of more than $10 billion annually on nearly $40 billion in revenues. Here's the ultimate irony: Time Warner, once the world's largest media company, could, itself become a choice takeover target in better times.

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