Time Warner Cable Puts IPO On Hold

The much-anticipated initial public offering of AOL Time Warner Inc.'s cable television unit is officially in limbo, but could be restarted if the parent company feels the need to have a cable-only currency to help it grow its MSO footprint, chairman and CEO Dick Parsons told analysts last Wednesday.

The Time Warner Cable IPO was expected to generate as much as $4 billion. But Parsons, speaking to analysts in a conference call discussing second-quarter results, said the urgency to raise that money has diminished.

A 7% hit to stock

Investors apparently didn't feel the same way, driving down AOL Time Warner stock by more than 7% ($1.14) to $15.71 in 4 p.m. trading Wednesday. The stock was down another 40 cents last Thursday, to $15.31.

A sluggish stock market and an ongoing investigation by the Securities and Exchange Commission into some of the accounting practices of its America Online Internet unit have also held up the cable IPO, which was expected by the end of the year.

In a statement, AOL said the SEC has informed it that it considered the accounting for a pair of transactions between AOL and Bertelsmann AG last year involving about $400 million in advertising revenue is incorrect.

AOL said it considers the accounting of the transactions to be appropriate and is continuing to talk with the SEC.

In the statement, AOL said that given the SEC's conclusion, "it is likely that the SEC would not declare effective any registration statement of the company or its affiliates, such as the potential initial public offering of Time Warner Cable Inc., until this matter is resolved."

Parsons told analysts Wednesday that when AOL Time Warner first announced its intent to issue the IPO last year, the media giant had serious balance-sheet issues. But with improved performance and the sale of two assets — its 50% interest in cable network Comedy Central for $1.225 billion and the pending sale of its DVD and CD manufacturing unit for $1.05 billion — coupled with a $760 million settlement with Microsoft Corp., AOL Time Warner doesn't need the IPO cash as much as it did last year.

"Part of what was involved behind the cable IPO was balance-sheet management," Parsons said on the call. "As we looked at the menu of things we could move on, the balance-sheet management issues have evaporated. We are going to get to our objectives without that."

Parsons added that the cable IPO may make sense if AOL Time Warner decides that a cable-only currency will enable it to make acquisitions.

"We like the cable business," Parsons said. "As we think about 2004, 2005 and 2006, we would like to have a bigger footprint in the cable business. We think it's a business that is going to be consolidating over time and we would like to be a player in that business. There may well be strategic reasons to have a cable-only currency in which to play."

Comcast on board?

Comcast Corp. — which owns 21% of Time Warner Cable through the restructuring of the Time Warner Entertainment partnership last year, and is a partner with Time Warner in cable joint ventures in Kansas City and Texas — could force an IPO. But Parsons hinted that the two MSO powerhouses are working toward an alternative arrangement.

"We are in constant communication as to how to unscramble the remaining parts of that egg," Parsons said. "[Comcast president] Brian Roberts and his team are very sophisticated. They have a lot of flexibility in time. They're not feeling time constraints; we're not feeling any time constraints.

"We're looking for ways to move them closer to their goal, which is ultimately to exit those relationships, consistent to our goal, which is to not shrink but, over time, grow our cable footprint."

Comcast's stake in Time Warner Cable is currently in a blind trust. As part of the approval of its acquisition of AT&T Broadband in November, Comcast agreed to divest the Time Warner stake within five years.

"We've had constructive discussions regarding the IPO, but Comcast has clear rights that allow us to move the process forward when we want," Comcast said in a statement. The company declined to comment further.

Parsons was encouraged by AOL Time Warner's ability to reduce leverage — net debt for the quarter was about $24.2 billion, down from $26.3 billion in March – and the company is on track to meet its goal of slashing debt to $20 billion by the end of next year.

For the quarter, AOL reported a 6% increase in revenue and a 6% gain in operating income before depreciation and amortization (also known as cash flow) fueled by strong growth at its cable systems and networks.

Cable revenue rose

For the quarter, cable revenue was up 9% to $1.9 billion and operating income before depreciation and amortization was up 11.4% to $752 million. Basic cable subscribers rose 0.9% (117,000 customers) during the period to 10.9 million. Time Warner Cable added 136,000 digital subscribers and 170,000 high-speed data customers during the period.

The data subscriber additions were about 15% less than in the first quarter, causing some analysts concern.

AOL media and communications group chairman Don Logan said on the call that the slower high-speed data growth was expected, but saw no cause for concern.

"The second quarter was kind of a strange quarter," Logan said. "We had the war. The economy was kind of bouncing around all over. You had a lot of press about these things. And I think it's too early for us to know whether there's a trend developing. Right now, we don't believe so."

Fulcrum Global Partners analyst Richard Greenfield agreed.

In a report, Greenfield said the lower data additions were likely due to the seasonality of the second quarter — a period when many students disconnect their service as they return home from college — and an increased focus on advanced digital products like HDTV, digital video recorders and video-on-demand.

At the networks, which includes cable channels and AOL Time Warner's broadcast network, The WB, revenue rose 10.1% to $2.2 billion and cash flow declined 14.5% to $359 million after a one-time charge of $178 million related to its winter sports teams. Without that non-cash charge, network cash flow would have increased 28%.

At the America Online unit, subscribers continued to decline — by 846,000, to 25.3 million in the period — as AOL churns off unprofitable narrowband customers and rolls out its broadband Internet product.