Icahn demands Time Warner separate cable business

NEW YORK - Billionaire investor Carl Icahn has demanded Time Warner Inc separate its cable business and buy back at least US$20 billion ($28.64 billion) worth of its stock to boost shareholder value.

Icahn, a corporate raider turned shareholder activist, whose hostile takeover of TWA in 1985 is legend on Wall Street, has organized a group of shareholders whose stock and options represent 2.6 per cent of shares, he said in a statement.

In one of his more audacious moves of late, Icahn said he plans to meet with Richard Parsons, CEO of Time Warner, the world's largest media company, this week.

Shares rose 1.6 per cent in afternoon trading.

While Icahn said that management has done "a commendable job managing each of their various businesses," he criticized it for not making moves to boost shares.

Parsons has won accolades on Wall Street for bringing harmony to warring divisions, slashing its debtload and closing the book on government probes and shareholder suits following the 2001 merger of America Online and Time Warner.

Despite the praise, shares have fallen over 6 per cent since the beginning of the year, in line with its media conglomerate peers. It has traded 7.58 per cent beneath the S&P 500.

A spokesman for Time Warner said the company would meet with Icahn.

"Our board and our management are committed to creating long-term value for all shareholders and we've been on a course that demonstrates that commitment," a spokesman said.

"We have a process in place in which we carefully review the range of options available to realize that value," the Time Warner spokesman said.

But Icahn, who has parlayed sizable stakes in video rental giant Blockbuster Inc and Kerr-McGee Corp into sweeping changes and board seats, may be too late.

"Things that needed to get done, the management has done," said Larry Haverty, a portfolio manager at Gabelli Asset Management, which owns 16.2 million shares of Time Warner as of May 31, 2005.

"It's the wrong time to do anything that's tax inefficient and (that could) subject owners to any unnecessary financial risks," Haverty added, referring to Icahn's calls to Time Warner to buy back up to US$20 billion in stock, up from its current commitments of US$5 billion.

Time Warner would have to borrow to buy back its stock to the levels Icahn's group demands during a time when interest rates are expected to go higher, Haverty said, adding that any media company needs buying power for acquisitions.

Among his proposals, Icahn is pushing the media company to completely spin off its cable business. Time Warner is expected to spin off about 15 per cent of its cable company after it closes a joint deal with Comcast Corp to buy Adelphia Communications Corp by early next year.

Weighing Time Warner's options presents something of a dilemma. On one hand, spinning off a minority stake is unlikely to appeal to long-term cable investors in a stock with little liquidity, with much of the equity falling into debt holders hands, said Fulcrum Global Partners analyst Richard Greenfield.

These debt holders "are likely to try to monetize their new Time Warner Cable equity quickly," hurting shares, he said.

Also, Wall Street is unlikely to view a full spin-off favorably, with cable valuations at 10-year lows on fears of competition from phone companies set to enter the video market and satellite TV.

"What's clear right now is that the market won't reward that," Haverty said about a true spin-off of Time Warner Cable.

On an enterprise value to cashflow ratio, Time Warner trades at around 10, and Comcast at 8.5, by some estimates.

Icahn also said his investors group would attempt to rally support from other large Time Warner shareholders about his views, although it was unclear if Icahn has been in touch with other big holders of Time Warner stock.

Well-known mutual fund investor Bill Miller, who oversaw 47.06 million shares of Time Warner stock at the end of March as a portfolio manager at Legg Mason Inc, said he had not spoken to Icahn.

"In the absence of a statement from (Icahn), detailing exactly what he proposes and why it is superior to the current strategy, we are unable to comment," he said in a statement.

Icahn said that the hedge fund group has agreed not to sell its Time Warner holdings until February 2007, or the date of the next annual meeting. The other hedge funds involved with Icahn include Franklin Mutual Advisors, JANA Partners and S.A.C. Capital Advisors.

Icahn said each member of the group has notified the company of their intentions to purchase "in excess of" US$500 million of Time Warner's stock.

Time Warner shares gained 29 cents to US$18.53 on the New York Stock Exchange, closing in on its 12-month high of US$19.85.

- REUTERS