| NEW YORK
NEW YORK Time Warner Inc (TWX.N) said on Wednesday it plans to fully separate its cable services division, responding to Wall Street's demands to refocus as a pure media content company to boost an ailing stock price.
Chief Executive Jeffrey Bewkes announced the decision in the company's first-quarter earnings report, which showed strength in advertising sales on cable television networks like CNN and TBS, offset by a sharp fall in AOL's revenue.
Investors have hoped that the media conglomerate, which owns about 84 percent of Time Warner Cable TWC.N, could shed more assets to restructure as a pure content company whose financials would be easier to forecast.
"We have now decided that, under the right circumstances, a complete structural separation is in the best interests of both Time Warner shareholders and Time Warner Cable shareholders," Chief Executive Jeffrey Bewkes said on a conference call with analysts, adding that he expected the two sides to reach an agreement on terms of the deal very soon.
Analysts said the move, widely expected by investors, could help attract more focused investors to Time Warner and Time Warner Cable, though the prospect of more shares on the market could temporarily cap gains.
"This is pretty much what we campaigned for a couple of years ago. I really think Bewkes is on the right track," said billionaire investor Carl Icahn, who had pressed Time Warner to spin off its cable division completely among other demands.
"It would have been better to do it a few years ago, but these things are never too late," he told Reuters in an interview.
Investors will focus on AOL as another target for divestiture, said Christopher Marangi, a portfolio manager at Gamco Investors Inc, which owns Time Warner shares.
Bewkes has already taken steps to revamp the company, which also owns Time Inc and the Warner Bros movie studios. Time Warner has held talks to merge its AOL online unit with Yahoo Inc YHOO.O to thwart Microsoft Corp's (MSFT.O) bid for Yahoo, sources have said.
By the end of the second quarter, Time Warner will have worked out the terms of the split of AOL's dial-up Internet service from its website and advertising sales business.
Time Warner shares fell 1 percent to $15.12, while Time Warner Cable rose 2.35 percent to $28.27.
Time Warner stock has lost a third of its value since the beginning of 2007 as AOL's future continued to worry investors, who have also sent shares in the entire media sector lower on fears of an advertising recession. By comparison, News Corp NWSa.N has fallen about 19 percent over the same period.
Net profit fell 36 percent to $771 million, or 21 cents per share, from $1.2 billion, or 30 cents per share, a year earlier, when the company booked a big gain from the sale of AOL's Internet access business in Germany and the unwinding of its cable partnership with Comcast Corp (CMCSA.O).
Excluding an impairment charge for an investment in video game developer SCi Entertainment Group, per-share profit was 22 cents, a penny below expectations, according to Reuters Estimates.
A restructuring charge at New Line, which was folded into the Warner Bros studio, cut another $116 million from profits, or about 2 cents per share. Another $20 million to $30 million is expected to be cut by the end of the year, Bewkes said.
Revenue rose 2 percent to $11.42 billion, matching analysts' estimates.
Revenue at its cable network division rose 10 percent to $2.7 billion, driven by subscription fees and a 13 percent rise in ad sales. For the first time in six years, CNN beat out News Corp's Fox News in viewership among the 18-49 and 25-54 age groups, during the first quarter, Time Warner said.
"This bodes well for other entertainment companies with cable programming assets," Bear Stearns analyst Spencer Wang said. Viacom Inc VIAb.N reports results on Friday.
Cable services beat expectations with revenue rising 8 percent to $4.2 billion despite competition from phone companies Verizon Communications Inc (VZ.N) and AT&T Inc (T.N), and satellite TV providers DirecTV DTV.O and Dish Network Corp (DISH.O). See nN30365703 for details.
"The result is a clear indication that, at the broadest level, the company is competitively 'holding its own,'" Bernstein Research's Craig Moffett said of Time Warner Cable in a report. "The genuine independence of a post-split Time Warner Cable probably warrants a premium on the stock," he added.
The split-off will let Time Warner Cable acquire companies using the stock.
AOL's quarterly revenue fell 23 percent to $1.1 billion, and adjusted operating income before depreciation and amortization (OIBDA) fell 25 percent to $405 million, because of lower subscription revenue. Online ads rose 1 percent.
AOL's ad sales are expected to improve in the second quarter from the first quarter, Time Warner said.
But full-year profit is expected to be lower than 2007 as display advertising business on its sites such as AOL.com suffer while it integrates acquisitions and while its lower margin, third-party advertising contribute more to earnings.
"We were not satisfied with the performance of display advertising on our owned and operated inventory," Bewkes said.
For the full year, Time Warner affirmed an earlier earnings forecast of $1.07 to $1.11 per share from continuing operations. It also still expects adjusted OIBDA to rise 7 percent to 9 percent from a base of $12.9 billion in 2007.
(Additional reporting by Yinka Adegoke and Dane Hamilton, editing by Lisa Von Ahn and Steve Orlofsky)