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Time Warner May Cut Cable

3/14/2008 8:00 PM Eastern

Time Warner CEO Jeff Bewkes hinted that the media giant is leaning toward a separation of its Time Warner Cable business at an industry conference last week, adding that despite his love for the cable business, its structure may not fit in with the overall company.

Bewkes first announced in February that Time Warner was investigating whether to divest its 84% interest in Time Warner Cable and said a final decision would be made in April.

At the Bear Stearns Media conference in Palm Beach, Fla., last Tuesday, Bewkes said that although Time Warner believes cable is a good business with growing cash flow potential, “we don't think that it is in its optimal capital structure. It can't necessarily leverage itself and create the optimal balance sheet, given the structure and sharing [debt] ratings. Secondly, it [the TWC stock] doesn't have enough float at 15% or 16%.”

Bewkes added that by reducing its interest in the cable unit, Time Warner Cable will have more flexibility operationally and financially. He said the company is evaluating whether the benefits of splitting the asset would outweigh the costs of a split.

“We really think it's pretty likely we will be able to achieve those benefits and get the cable business into a more flexible investment possibility,” Bewkes said.

A new structure would make it easier for Time Warner Cable to accomplish some of the investment options it has before it, including bulking up its footprint through acquisition, he said. And though the separation would remove 45% of Time Warner Inc.'s overall cash flow, Bewkes isn't concerned.

“It doesn't matter whether Time Warner as a conglomerate of holdings is larger or smaller, it just matters whether the return on capital is higher,” Bewkes said.

Asked whether a cable separation would allow Time Warner to offload some of its debt on the cable company and therefore make it easier for the media giant to make additional programming acquisitions — such as The Weather Channel or Rainbow Media Holdings — Bewkes hedged a bit, stating that while Time Warner “looks at everything,” the real test is whether a deal will create superior returns to shareholders.

“We're going to use the conceptual return demands of the shareholders to be the gating factor for anything we want to acquire,” Bewkes said. “We don't need to acquire anything.”

News Corp. chairman Rupert Murdoch echoed Bewkes comments later at the conference, adding that the media giant does not intend to join the fray for Yahoo.

Microsoft launched a $44.6 billion bid for the Web portal company earlier this year.

News Corp. has been among the parties speculated to be interested in getting into the bidding.

September