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Cable Operators

Agencies Approves Time Warner Cable Split

2/14/2009 2:00 AM Eastern

Time Warner Cable edged closer to its planned split from parent Time Warner Inc. last week, after the deal received a passing grade from two regulatory agencies.

The Federal Communications Commission signed off on the split on Feb.11, agreeing to transfer certain licenses from Time Warner Inc. to Time Warner Cable. On Feb. 12, the Internal Revenue Service issued a favorable tax ruling for the deal, the last regulatory hurdle for the split.

After the tax letter is received, it could be a matter of days before the transaction could be completed.

That would be well within the March 31 time frame both companies had predicted it would take for the deal to close.

“With today's favorable IRS ruling, we're pleased to report that all regulatory and other necessary governmental reviews of the pending separation of Time Warner and Time Warner Cable are concluded,” the companies said in a joint statement. “Now we're working through the process to achieve the separation. That process is on track and expected to be completed by the end of the current quarter.”

Time Warner proposed splitting off its 85% interest in the cable unit in May. As part of the deal, Time Warner Cable has agreed to pay a $9.25 billion dividend to Time Warner Inc.

The deal would finally sever all ties between the two media giants, creating one of the few pure cable plays in Time Warner Cable and allowing Time Warner Inc. to focus solely on its content assets, such as cable networks CNN, Home Box Office, TBS and TNT; its Time Inc. publishing assets; and its Warner Bros. movie studio.

While it will lose one of its main cash flow contributors in Time Warner Cable — the cable unit accounted for more than half of Time Warner Inc.'s $3.2 billion in total operating income before depreciation and amortization in 2008 — the company believes the split will allow both units to be more flexible.

In a research note, Sanford Bernstein cable and satellite analyst Craig Moffett wrote that a deal could be completed in a matter of weeks.

Time Warner Inc. has said that once the deal is completed, it will initiate a one-for-two or one-for-three reverse stock split to more align its stock price with its asset value.

Reverse splits are a common practice and are usually done to boost the value of the shares. In a reverse split, the number of shares outstanding changes, but the market value remains the same. So a stock that is priced at $2 per share with 12 million shares outstanding becomes a $6 stock with 4 million shares outstanding in a 1-for-3 reverse split.

September