Last Updated: May 23, 2008: 1:09 PM EDT
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Time Warner unlocks cash drawer

Time Warner Cable spin off reaps a one-time $10.9 billion dividend for shareholders, but piles on the debt.

By Scott Moritz, writer

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NEW YORK (Fortune) -- Time Warner is dangling an eye-popping $10.9 billion gift to shareholders as part of its spinoff of Time Warner Cable. But it's a gift that will keep on taking in the form of $10 billion in additional debt and a heavy financing burden shifted to the cable unit.

The deal, expected to close by year-end, will pay a one-time dividend of $10.27 a share to Time Warner shareholders, with $9.26 billion going to Time Warner (TWX, Fortune 500) which holds 85% of the cable unit's stock. Right after the payment, the company will distribute its 85% stake in Time Warner Cable to shareholders. To ensure the transaction is financed, Time Warner has secured for Time Warner Cable (TWC) a two-year $9 billion bridge loan from a group of banks and will tap $2 billion from its credit line.

The big debt move doesn't quite come under the heading of unlocking value, but it does follow through with a split up plan set in motion by billionaire raider Carl Icahn in 2005. For now, think of the $10.27 a share special dividend payable to Time Warner shareholders as stock protection.

Wall Street was braced for a little sticker shock as Time Warner, the parent of CNNMoney and Fortune, prepared to unload a small mountain of debt on its soon to be spun off cable unit. Analysts and investors were expecting something in the $6 billion to $8 billion range in terms of debt redistribution. What they got was $10 billion added to the $13.5 billion in debt already on Time Warner Cable's books.

What they didn't expect, however, was a $10.27-a-share jackpot. And that cash windfall has a calming effect.

These are not exactly great times to be a cable investor. Cut-throat competition in video has created a revolving door for subscribers who are coming and going in record numbers jumping on the latest triple play offers. To keep up with high-definition TV race with satellite shops like DirecTV (DTV, Fortune 500) and EchoStar (DISH, Fortune 500) and faster broadband connections from telcos like Verizon (VZ, Fortune 500), the cable companies face billions of dollars in network and set-top box upgrades. And for Time Warner Cable, in particular, the threat is even greater as Verizon expands its fiber optic network - dubbed Fios - into the prized New York market.

The slow growth and high-cost worries that have dogged the cable sector now fade into the background, however as investors eye the big pay day.

Time Warner and Time Warner Cable executives on a conference call with analysts Wednesday said the split gives the two companies flexibility. Time Warner could use the cash to pursue media expansion moves like an acquisition of NBC Universal, suggests Merrill Lynch analyst Jessica Reif Cohen.

Time Warner Cable gains greater freedom to pursue its costly WiMax wireless expansion project for example, without burdening its parent with endless funding requests. Early this month, the cable shop committed at $550 million to a national WiMax network construction joint venture run by Sprint and Clearwire. And if the broadband wireless effort lives up to expectations by spawning the next generation of mobile data devices and services, there will be further investments that will require financing.

For now though, Time Warner Cable will find it tough to pursue any major deals because of its heavy debt burden. For example, it probably won't attempt to takeover a company like Cablevision (CVC, Fortune 500), which had been a growing source of speculation as the company looks for ways to fend off Verizon.

And while shareholders may be relieved that a costly deal is now less likely, so are crowd-pleasing gestures like a big stock repurchases, say analysts. "This dividend does appear to essentially block Time Warner Cable from doing any material returns of capital (such as buybacks) to shareholders," Lehman Brothers analyst Vijay Jayant wrote in a report Wednesday.

Investors appeared to be okay with that, sending Time Warner Cable's shares up more than 3% in trading Wednesday. Time Warner shares inched higher as well. To top of page

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