Cable Operators

Icahn’s Book: Split Up TW

2/10/2006 7:01 PM Eastern

New York— Carl Icahn and company’s plan for restructuring Time Warner Inc. landed with a thud last week, in the form of a 343-page book advocating splitting the media giant into four separate publicly traded companies: America Online; Time Warner Cable; the Warner Bros. movie studio and cable networks; and its publishing businesses.

The report by Icahn advisor Lazard Ltd. calculates Time Warner has lost $40 billion in market capitalization since 2002 and that its shares underperformed major stock indexes by 40%.

Speaking in a packed room at the St. Regis Hotel here last Tuesday, Lazard chairman Bruce Wasserstein said Time Warner senior management has run the company for the short term — missing out on key acquisitions such as film studio Metro-Goldwyn-Mayer Inc. (bought by a consortium of private equity groups, Sony Corp. and Comcast Corp.) and cable operator AT&T Broadband (purchased by Comcast) while mismanaging a key asset, Internet-service provider America Online.

Lazard’s report said merely splitting up the businesses could add $6 to $9.25 per share in value to Time Warner shareholders.

The scolding was harshest when it came to Time Warner’s handling of AOL. Chairman and CEO Richard Parsons and the rest of Time Warner management failed to nurture or invest in AOL, neglected to pair the unit with the Road Runner cable-modem service and blocked its entry into the phone business because it infringed on similar efforts at Time Warner Cable, the Icahn manifesto contends.

Time Warner also stands accused of not capitalizing on the potential of networks and publishing, pointing out that Turner Broadcasting System Inc. hasn’t launched a successful new cable channel since it was acquired by Time Warner in 1996.

Wasserstein chided Time Warner’s fourth-quarter earnings — revenue was up 4% for the year — as “anemic.” He said recent plans to boost a share buy-back to $12.5 billion from $5 billion and to sell the book division were insufficient and came only after shareholder pressure.

Icahn, who has been feuding with Parsons since August, controls about 3% of Time Warner stock, far short of a majority that would be needed to affect major changes.

But the controversial investor hopes the report sways shareholders to vote for a slate of directors he backs. He said he’d offer more specifics on that group in a week or so.

The consensus seems to be that Icahn’s pressure has already forced Time Warner to make some changes.

“To us the bottom line is that the group’s efforts will prove beneficial for Time Warner shareholders, because we think they have already lit a fire under management to a degree, persuading it to take several positive actions (the buyback, asset rationalization, cost-cutting, etc.) and we expect it to continue on this course,” Banc of America Securities cable analyst Doug Shapiro said in a research note. “So the Icahn group may lose the battle but, if the stock goes up, it will have won the war.”

Frank Biondi, who would become chairman and CEO of Time Warner if the dissident revolt succeeds, said the separation could take nine to 18 months to complete. He would become chairman and CEO of “new Time Warner,” consisting of the cable networks and the Warner Bros. movie studio.

He would pass the CEO reins to another executive — hopefully current Time Warner chief operating officer Jeff Bewkes — shortly after the spin was completed.

Biondi said later that he had not spoken to Bewkes, but has had contact with other Time Warner executives who he said were eager to see their stock price rise.

In a statement, Bewkes reiterated his loyalty to Parsons, saying, “Dick and I are a team, and any speculation to the contrary is not worth commenting on.”

Icahn spent a considerable amount of time at the press event criticizing Parsons. “A great company in the media business today needs vision and visionary leaders; it does not need a conglomerate structure, centered at Columbus Circle, that second-guesses,” he said.

In a statement, Time Warner said it is on the right path and would review the Lazard report.

Time Warner stock closed at $18.36 on Feb. 7, down 21 cents. It opened last Friday at $18.30.

September