Time Warner, Cable Division Part Ways

The separation with Time Warner Cable gets Time Warner out of the media distribution business altogether, something investors had been clamoring for. The company announced its decision to split up last month, and said Wednesday that the boards of the two companies had agreed to financial terms.

Time Warner Cable is the second-largest cable provider in the country after Comcast (Nasdaq: CMCSK) with about 13.3 million video subscribers. It has been a public company for more than a year, but Time Warner had held on to an 84 percent stake.

Increasing Competitiveness

Jeff Bewkes, Time Warner's CEO, said in a statement that separating Time Warner Cable into its own business will give both companies "greater strategic, financial and operational flexibility" in order to compete.

Cable operators tend to have much different capital requirements than entertainment and other kinds of media companies, with significant demands for investing in infrastructure and new technologies as well as a reliable base of cash flows needed to service the debt needed for those investments.

Having its own stock will also allow Time Warner Cable to have a currency to use in potential acquisitions for other cable providers.

Time Warner said it would distribute the proceeds of the $9.25 billion dividend from Time Warner Cable to its shareholders in a yet-to-be-determined "tax-efficient manner." The split must receive a favorable tax ruling from the IRS as well as other regulatory approvals and local franchise clearances.

Narrowing Its Focus

Investors cheered the terms of the spinoff and dividend, which Time Warner Cable will fund with its existing credit facility and a two-year bridge loan from a syndicate of banks.

Time Warner Cable's shares rose $1.18, or 3.9 percent, to $31.40 Wednesday morning while Time Warner's shares rose 19 cents, or 1.1 percent, to $16.34.

Once Time Warner Cable is split off, Time Warner will be a largely entertainment-focused company centered on the Warner Bros. movie and TV production studio, the Time Inc. magazine publishing group and a large portfolio of cable networks that includes HBO, CNN, TBS and TNT.

The next strategic imperative for Time Warner and Bewkes, who became CEO at the beginning of the year, is to figure out what to do with its struggling AOL division, which is trying to remake itself as an online advertising company as revenues from its legacy dial-up Internet access service rapidly dwindle.

AOL's Future

Time Warner is in the process of separating AOL's advertising operations from the access service and has been considering various possibilities for a transaction or combination with another major Internet company such as Yahoo (Nasdaq: YHOO) , Microsoft (Nasdaq: MSFT) or News Corp.'s MySpace .

Those talks have been complicated by Microsoft's continuing interest in some kind of transaction with Yahoo, an effort by the software maker to delve further into the growing online advertising market and compete with market leader Google (Nasdaq: GOOG) .

Investors have been adamant that Time Warner further simplify its sprawling capital structure and take other aggressive action to boost its lagging share price, which has largely traded below $20 for the past five years.

The split calls for Time Warner Cable to pay a total dividend of $10.27 per share or $10.9 billion to shareholders, of which parent company Time Warner will receive $9.25 billion.

Time Warner also will convert its supervoting Class B shares into common stock on a 1-for-1 basis, creating a single class of stock.