Time Warner Inc. is inching closer to an untangling of what many consider one of the worst mergers in American corporate history by shedding America Online.
Could the company’s vast magazine empire under Time Inc., which publishes Sports Illustrated, Time, Fortuneand People, be next?
In a regulatory filing on Wednesday, Time Warner said it was nearing a decision to spin off America Online, and put an end to the travails that began with the merger in 2000 of the two companies, a deal that has resulted in the evaporation of more than $100 billion of shareholder value.
Unravelling merger: Time Warner chief executive Jeffrey L. Bewkes.
“Although the company’s board of directors has not made any decision, the company currently anticipates that it would initiate a process to spin off one or more parts of the businesses of AOL to Time Warner’s stockholders, in one or a series of transactions,” the company said in the filing.
The announcement, which was not unexpected, came on the same day that the company reported first-quarter earnings, which surpassed Wall Street analysts’ expectations. But the numbers for both AOL and Time Inc. were equally dismal.
When asked during a conference call about the future composition of Time Warner, Jeffrey L. Bewkes, the company’s chief executive, said it “may well include publishing, but we’re not making a religious statement about it either way at this point.”
That seemed to leave open the door for a potential sale or spin-off of Time Inc.
“They’ve been smart to not box themselves in either way,” said Michael Nathanson, an analyst at Sanford C. Bernstein. “I think they are going to see if this downturn is more cyclical than secular, and see if they can start charging for some of their online content.”
By this, Nathanson meant the company would wait to see how much of Time Inc.’s troubles were because of the cyclical nature of the economy and how much was permanent because of the flight of readers to the Internet.
Robin M. Diedrich, an analyst at Edward Jones, said much of Time Inc.’s revenue loss was “not necessarily going to come back when the economy improves.” Diedrich added, “It’s not surprising that the company is considering what the long-term options are.”
As for AOL, Nathanson echoed what many on Wall Street believe. “We’re pleased AOL will finally be on its own,” he said. “It’s been a distraction for a number of years.”
If Time Inc. were eventually to be lopped off, Time Warner still would include several profitable cable networks— TNT, TBS, CNN and HBO—as well as the Warner Brothers movie studio. It would be in keeping with Bewkes’s stated vision of Time Warner as a company centred on producing television and movies for a mass audience.
“Today, we are a much more content focused company,” he said.
Time Warner, under Bewkes, who became chief in 2007, has become a stripped-down conglomerate focused on producing content rather than delivering it. This year the company, which was once the world’s largest media company, spun off its cable division, Time Warner Cable, into a separate publicly traded company.
Revenue at both AOL and Time Inc. declined by 23% compared with the previous year’s first quarter. In the case of AOL, revenue fell to $867 million. Subscription revenue fell 27%, while advertising fell 20%.
Revenue at Time Inc. fell by $239 million, to $806 million. Advertising fell by 30%, or $167 million, and subscription revenue declined by 16%, or $58 million.
“Advertising at AOL and Time Inc. especially is proving tougher than we expected when we last talked a few months ago,” Bewkes said during the conference call.
Over all, the company said revenue declined 7% to $6.9 billion, when compared with the same period last year.
Revenue from publishing, AOL and Warner Brothers all declined, while revenue at the cable networks, which have been the most durable segment of the media industry during the recession, rose to $2.8 billion from $2.7 billion.
Net income for the quarter was $661 million, or 55 cents a share, compared with $771 million and 64 cents a share in the previous period. Excluding some items, earnings were 45 cents a share.
By this measure, the company beat Wall Street analysts’ expectations of 39 cents a share, according to Reuters Estimates.
At Warner Brothers, while revenue dipped 7%, operating income increased 10% to $308 million, partly because of reduced marketing and advertising costs for movies.
Time Warner received a nearly $9 billion dividend from spinning off Time Warner Cable, cash that Bewkes said he would use to buy back stock after the company announces firm plans for AOL. The company still has $2.2 billion left on a stock repurchase plan approved by the board.
The rest of the Time Warner Cable cash could be used to pay dividends or make acquisitions, but Bewkes was cautious on this last point.
“We know that most M&A in the media sector has not created value,” he said.
©2009/THE NEW YORK TIMES