Has Wall Street got it all wrong about a Time Warner Inc. break-up? It’s etched into banker bedrock that the media conglomerate must split into its components. Time Warner’s stock is still dragging two years after corporate gadfly Carl Icahn tried to get then chief Dick Parsons to break up the company. This lacklustre performance puts pressure on Jeffrey Bewkes, who took over the top job last week, to disassemble the media behemoth.
But Bewkes could consider an alternative. The fact is, a Time Warner in pieces doesn’t look to be worth much more than the whole. Revisiting the reasons the conglomerate was assembled in the first place, notably through the merger with AOL Llc., has some logic. Greater integration of some of the media assets, if accompanied by deep cost cuts of the firm’s bloated expenses, might serve shareholders better.
Consider the value of Time Warner’s pieces on a stand-alone basis. Today, Time Warner commands a market capitalization of about $57 billion (Rs2.24 trillion), plus $35 billion of debt. Strip out the enterprise value of Time Warner’s stake in Time Warner Cable Inc., the partially listed cable arm, and that suggests investors value the rest of the company’s businesses at $58 billion.
That’s about right. At 10 times earnings before interest, taxes, depreciation and amortization— the multiple that rival Viacom Inc. fetches—Time Warner’s cable channels, such as Home Box Office Inc., and the filmed entertainment businesses, which includes Warner Brothers film studio, would be worth about $46 billion. The publishing business, which counts magazines such as Time and Fortune and the Random House Inc. book imprint, is probably worth about $7 billion if put on the same multiple of earnings as rival magazine house Meredith Corp. Finally, add Time Warner’s 95% stake of AOL, worth about $13 billion, according to UBS AG.
Fold these together, add back the parent’s stake in Time Warner Cable, slice out about $3 billion associated with the capitalized value of Time Warner’s substantial overhead costs, and its total enterprise value is about $97 billion. That’s just $5 billion or so above the current value. Given the risks associated with a break-up, that’s not much upside.
A better way to please shareholders would be to take a sharper scalpel to Time Warner’s costs. Trimming corporate overhead by one-third and cutting costs by 10% at each division would increase Time Warner’s value by some $7 billion. Parsons, who never ran a media business from the trenches like Bewkes, failed to do this. But since breaking up the company isn’t an obvious home run, Bewkes might give it a try.