Time Warner takes steps to restructure as shares rise

NEW YORK Wed Feb 6, 2008 3:09pm EST

People walk in front of the Time Warner Inc. headquarters building at Columbus Circle in New York October 13, 2005. Time Warner Inc said on Wednesday it expects profit growth to slow in 2008 but possibly exceed Wall Street estimates after it reported quarterly earnings that reflected increases in broadband and phone subscribers and sales of ''Harry Potter'' and ''300'' home videos. REUTERS/Nicholas Roberts

People walk in front of the Time Warner Inc. headquarters building at Columbus Circle in New York October 13, 2005. Time Warner Inc said on Wednesday it expects profit growth to slow in 2008 but possibly exceed Wall Street estimates after it reported quarterly earnings that reflected increases in broadband and phone subscribers and sales of ''Harry Potter'' and ''300'' home videos.

Credit: Reuters/Nicholas Roberts

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NEW YORK (Reuters) - Time Warner Inc on Wednesday forecast 2008 profit growth to match or beat Wall Street estimates and took the first steps toward restructuring what until recently was the world's biggest media company.

These moves involve cost cuts across the company, starting with eliminating 100 jobs from its corporate offices to save about $50 million a year.

Time Warner also plans to split the AOL Internet division's dial-up business, which is losing subscribers, from a growing Web site and advertising business -- a move that could make a sale or spin-off easier.

Time Warner will begin discussions to possibly spin off its 84 percent stake in Time Warner Cable.

The company will also seek to cut costs at its New Line Cinema studio, known for the "Lord of the Rings" franchise and "Hairspray," and review its current structure as an independent studio.

Time Warner shares rose as much as 5 percent on Wednesday. They had lost as much as 36 percent since their most recent 52-week high in June 2007.

The media conglomerate is under pressure to revive its ailing stock price and come up with a new strategy for AOL as it faces potentially stronger competition if Yahoo Inc accepts a $45 billion offer from Microsoft Corp.

"We'll make sure that Time Warner has the right businesses in the right structure," newly appointed Chief Executive Jeffrey Bewkes said. "In change lies opportunity."

Time Warner said fourth-quarter profit fell to $1 billion, or 28 cents per share, from $1.8 billion, or 44 cents per share, a year earlier, when it logged a big gain from sales of AOL units and other items.

Excluding special items, earnings were 29 cents a share, matching the analysts' average forecast, according to Reuters Estimates. Year-earlier profit, excluding the gain, was 22 cents a share.

Revenue rose 2 percent to $12.64 billion, in line with Street forecasts.

"The numbers were slightly above our expectations across the board, led by cable," said analyst Christopher Marangi of Gabelli & Co, which owns shares of Time Warner.

The media conglomerate, which owns AOL, CNN and Time Inc, forecast adjusted operating income before depreciation and amortization to rise 7 percent to 9 percent this year, which could exceed Wall Street's forecast of 7 percent growth.

While its 2008 profit growth is sharply lower than 2007's 17 percent rise, that is largely due to Time Warner Cable's purchase of Adelphia cable systems, which closed in mid-2006. Excluding gains from that deal, 2007 growth would have been 8 percent.

"Given the low valuation, negative sentiment and potential for positive restructuring news flow, (Time Warner) appears to be a safe place in the coming months," Bernstein Research analyst Michael Nathanson said in a research note.

RESTRUCTURING BEGINS

A deal between Microsoft and Yahoo could eliminate two potential partners or buyers of AOL but raise the valuations of online assets. It could also redraw the Web ad landscape and consolidate power between Microsoft and Google Inc.

Bewkes told analysts on a conference call that Time Warner's move to separate AOL's operations "should significantly increase AOL's strategic options."

AOL was restructured last year to become a one-stop shop for Web advertising. First-quarter online ad sales are expected to fall, but growth is expected to return by the second quarter, Chief Financial Officer John Martin told analysts.

Bewkes also said the company is starting negotiations with Time Warner Cable over a possible spin-off of its 84 percent stake. Talks will likely conclude by the time it reports first-quarter earnings, executives said.

The current ownership structure is "less than optimal" for both companies, Bewkes said.

In response to a question, Bewkes did not rule out the possibility of buying back Time Warner Cable, which has lost nearly half of its market value on threats of more competition from telephone companies and a possible U.S. recession.

AOL ADVERTISING TO GROW

Once the world's largest media company by market capitalization, Time Warner has lost that title to News Corp as its shares fell over the past year on concerns about AOL and the weakening U.S. economy's impact on cable.

News Corp and Walt Disney Co reported quarterly results this week that handily beat Wall Street forecasts on nearly every front and said they saw no signs of a possible recession.

Time Warner has not given up on AOL yet. On Tuesday, it purchased buy.at -- its fifth online advertising-related acquisition in 12 months.

AOL's quarterly revenue fell 32 percent, dragged down by a loss of 740,000 subscribers, while adjusted operating profit rose 29 percent. Online ad growth, a closely watched barometer of progress for the division's restructuring, rose 10 percent.

Movie studio revenue rose 13 percent, while operating profit before items increased 46 percent, boosted in part by the box office sales of the film "I Am Legend."

Time Warner said it expected 2008 earnings per share of $1.07 to $1.11 from continuing operations, below Wall Street's projection of $1.12.

AOL's adjusted operating profit could reach 2007 levels, but could also be down slightly.

Time Warner Inc stock rose 3 percent, or 46 cents, to $15.86 in late afternoon trading on the New York Stock Exchange.

Time Warner Cable's shares were down 2.8 percent, or 67 cents, at $23.73 after it gave a weaker 2008 outlook.

(Additional reporting by Gina Keating in Los Angeles)

(Editing by Lisa Von Ahn, Maureen Bavdek, Gary Hill)

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