Time Warner may shed AOL unit and cable

Media conglomerate says it may sell part of AOL and spin-off more of Time Warner Cable. Company also sees slower earnings growth in '08.

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By Chris Isidore, CNNMoney.com senior writer

Jeff Bewkes, Time Warner's new CEO, announced the company is looking at possibly shedding the traditional dial-up business of AOL and the company's cable unit.
Jeff Bewkes, Time Warner's new CEO, announced the company is looking at possibly shedding the traditional dial-up business of AOL and the company's cable unit.
Big media to the rescue
Big media to the rescue: Disney's solid earnings and Time Warner's restructuring plans boost stocks.

NEW YORK (CNNMoney.com) -- Time Warner's new chief executive officer confirmed Wednesday that the media company is separating its struggling AOL access business from the division's growing online advertising business, a move that could lead to the sale of the traditional dial-up unit.

Jeff Bewkes, Time Warner's CEO, said the company also may move to sell all or some of Time Warner Cable, which has seen its separate stock slide by about 40% since the company put a 16% stake up for sale to the public a year ago.

And Bewkes said that the company is looking to cut costs in its corporate offices by 15%, which should produce $50 million in annual savings. There have been reports that the company plans to eliminate 100 positions from corporate management. Bewkes did not confirm any layoffs during the call, but a source confirmed the headcount reduction to CNN.

Shares of Time Warner were up nearly 3% in mid-afternoon trading Wednesday, although they were off of earlier highs. Shares of Time Warner Cable, which had been higher ahead of the announcement, were down 3.6% in mid-afternoon trading.

Bewkes made the comments during the company's earnings conference call Wednesday morning, after the company reported improved earnings that hit forecasts. He said that separating AOL's Internet access and content businesses could lead to an eventual sale of one of those units.

"We're working on separating AOL's access and audience businesses so we can run them independently. This should significantly increase AOL's strategic options," he said.

Bewkes added that Time Warner is holding discussions about changes in the ownership level of Time Warner Cable, a separately traded stock that Time Warner currently owns an 84% stake in.

He said that the current ownership structure of Time Warner Cable is "less than optimal for both companies" and that Time Warner will make a decision about what to do with Time Warner Cable by the time the company reports its first quarter earnings in May.

Cable stocks have generally been performing badly for the past year. Even with its slide, Time Warner Cable (TWC) has outperformed No. 1 cable operator Comcast (CMCSA), whose shares have lost 58% over the same period.

"Nobody should think we've lost faith in cable's business prospects. Quite the opposite, we think it's undervalued, substantially undervalued," Bewkes said. When questioned, he did not rule out that Time Warner might decide to repurchase the 16% stake that is now publicly traded, given its low valuation, but most of his comments suggested a sale was more likely.

"It doesn't follow necessarily from that optimistic view (of the cable industry) that Time Warner Cable is best positioned in its current ownership structure within Time Warner," he said.

Mixed guidance for 2008

The AOL and Time Warner Cable news came as Time Warner reported solid gains in its cable and studio units to overcome declining earnings and revenue at AOL.

Time Warner (TWX, Fortune 500) the world's largest media conglomerate by sales, said it earned 29 cents a share from continuing operations, excluding special items, in the fourth quarter. That was in line with the forecast of analysts surveyed by earnings tracker Thomson First Call and up from the 22 cents it earned on that basis a year earlier.

Including special items, it saw net income in the quarter fall to $1 billion, or 28 cents a share, from $1.7 billion, or 43 cents a share a year, when it had a gain from the sale of America Online's Internet access businesses in Great Britain and France.

Revenue rose 2% to $12.6 billion, which also met forecasts.

The company said it is looking for 2008 earnings from continuing operations to be between $1.07 to $1.11 a share, compared to the 96 cents a share it earned, excluding items, in 2007. That would be up 11 to 15%, compared to a nearly 19% jump in 2007. Analysts had been forecasting earnings of $1.11 per share for 2008.

The company also said its adjusted operating income before depreciation and amortization should grow 7% to 9% off of the base of $12.9 billion, after a 17% gain in 2007. That would put earnings at or above First Call's current forecasts of $13.8 billion for that measure.

AOL continues to struggle

The company saw overall subscription revenue slip 1.4%, due primarily to subscriber losses at America Online. Subscription revenue accounts for about half of the company's revenue base.

But overall advertising sales, which accounted for 28% of the revenue, rose 6%, while content revenue rose 7% in the quarter.

The company saw a 32% plunge in revenue at AOL, as it lost 29% of the subscribers it had a year earlier. Operating income at the unit tumbled 70% due to the sale of its Internet access business in Great Britain and France.

But Bear Stearns analyst Spencer Wang said the problems at AOL were actually not as bad as expected. In a note to clients, he said the profit margin at AOL was a half percentage point better than he expected, leading to earnings from the unit topping his forecasts.

Nonetheless, Bewkes said during the conference call that work has already begun on splitting AOL into two units and that this is a top priority for the company. He cautioned that a split will take some time though.

"We think it will take several more months because it's fairly complicated," he said.

Bewkes also pointed out that Microsoft's (MSFT, Fortune 500) unsolicited $45 billion bid for AOL rival Yahoo (YHOO, Fortune 500) "demonstrates the value" of AOL. Time Warner had previously sold a 5% stake in AOL to search giant Google (GOOG, Fortune 500) for $1 billion.

The AOL weakness was balanced by strong revenue gains at cable and filmed entertainment.

Cable and movies shine

Time Warner led rivals in domestic box office share at 20.5% and saw strong gains in overseas ticket sales, led by the hit "I Am Legend," which set a record for a December opening box office.

Warner Home Video was also an industry leader in sales, led by the DVD releases of "300" and "Harry Potter and the Order of the Phoenix."

In addition, he said the company is looking at cutting costs in the unit by eliminating the duplicate management structure that runs the separate New Line and Warner Bros. studios, although it will likely continue to use the New Line brand.

Cable, the company's largest unit by revenue, saw revenue rise 12% and operating income jump 26%.

Sanford Bernstein cable analyst Craig Moffett wrote in a note to clients early Wednesday that given problems in the cable industry results in recent quarters "the fact that Time Warner Cable has managed to hit essentially all of its quarterly and annual marks must be judged a positive."

Time Warner also owns CNNMoney.com, magazine publisher Time Inc. and numerous television networks, including CNN, TNT and TBS.

During the call, Bewkes shot down speculation that Time Warner may sell its magazine unit.

"We're good at publishing. We're a leader in the industry. It's a good business we think. As it expands out beyond print into digital we think it can turn into a growth business," he said.

The company's results follow better-than-expected revenue and earnings reported after the bell Tuesday by rival Walt Disney (DIS, Fortune 500), as well a narrow gain in earnings at News Corp. (NWS, Fortune 500) that met forecastsTo top of page

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