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Time Warner May Spin AOL, Buy Video Games


Time Warner on Monday took its first serious step toward leaving its AOL baggage behind -- eight years after the fateful merger that shook the conglom to its core.

Over the past month, under the leadership of CEO Jeff Bewkes, the media conglom has pared itself down to a pure content company, or nearly so, by splitting off Time Warner Cable -- pocketing more than $9 billion in the process. It acquired a big chunk of Central European Media for $240 million and continues shopping.

Guessing how the company will unload all that cash has become one of Wall Street's favorite parlor games.

After Time Warner hired highly regarded Google exec Tim Armstrong to run its AOL unit in mid-March, TW moved Monday to begin unloading all or part of its Internet arm.

In a statement, Time Warner said it's offered a payment to bondholders who agree to amend certain covenants that currently restrict AOL's ability to sell any of its properties or assets.

The so-called consent solicitation applies to about $12.3 billion in outstanding debt. Time Warner has offered to pay $5 for each $1,000 principal amount of debt securities. That means the company will pony up around $61 million to bondholders if they all agree to the offer, which expires April 15.

Time Warner said the agreement will be guaranteed by using HBO as collateral.

"We view this announcement as significant as it clears a major hurdle to spin AOL to Time Warner shareholders," Sanford Bernstein analyst Michael Nathanson said in a note to clients.

Time Warner said in August that it would separate AOL's advertising and dial-up Internet operations as it considers shedding one or both parts of the business.

The AOL merger has made Time Warner more wary of big deals than most companies. But, as the CME deal shows, it's certainly open to acquisitions, in addition to paying down debt and boosting its dividend.

"We ... have a lot of extra capacity financially in the event that there was a business that would strategically fit with Time Warner (and) was in a position where you could acquire it reasonably rather than too expensively," Bewkes told CNBC at the National Cable & Telecommunications Assn. conference in Washington, D.C., last week. "And a lot of companies are in trouble," he added, "so there may come opportunities like that."

Time Warner received a special dividend payout of about $9.25 billion from spinning off its cable operations.

With that kind of cash, one investor speculated, the conglom could make a bid for NBC Universal, owned by struggling General Electric.

People close to Time Warner dismissed that idea, noting that Wall Street would clobber the company for such a deal. And, in any case, said another fund manager, "GE is smart enough to understand that there is a much better time to sell than now."

He sees videogame concerns Electronic Arts and Take-Two Interactive as juicy targets "because the stocks are cheap and it's the fastest-growing industry in the media field. And I think it makes more sense to buy rather than build."

Electronic Arts is trading at under $20 a share compared with a 52-week high of $54.81. Take-Two stock is changing hands at under $10 from its high of $29.95. And GE is languishing at $11 but has been as low as $5.87 vs. its year high of $37.90. A recent BusinessWeek headline on the company read, "GE's Jeffrey Immelt: All boxed in. No matter what the CEO does to try to save his company, it has lost its aura of greatness."

Investors all agree that for any media company, perpetually attractive cable networks are a no-brainer acquisition. But the question is, said one, "Is there a buyer and is there a seller?"

Price has been a sticking point in most potential mergers since the economy did a belly flop. Buyers want things dirt cheap, and sellers still want to get full price, so it's almost impossible for the twain to meet.

One of the rare deals in any industry to be announced in recent months, IBM's $7 billion acquisition of Sun Microsystems, fell apart over the weekend after Sun's board apparently balked at a lower price.

Time Warner shares closed down 2.97% at $21.56 on Monday amid a glum market.

If that price looks higher than expected, it's largely because of another initiative: Late last month, Time Warner implemented a one-for-three reverse stock split, which essentially bundles three shares into one, creating fewer shares that are worth more.

The move, said Bewkes, aims to enhance the stock's "liquidity and marketability and move us closer in line with the New York Stock Exchange's average per-share trading price."




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