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September 18, 2007

Forget The Time Warner Breakup Stories

I want to echo the comments about Time Warner made yesterday by Chris Atayan, my RealMoney.com colleague. Despite renewed speculation, a breakup of the company is unlikely to add value in the near-term. Time Warner is overanalyzed and sum of the parts has been modeled exhaustively. If the sum of the parts were significantly higher than the low $20s, the stock would be higher. Put Comcast's multiple on the Cable segment, Viacom's multiple on Filmed Entertainment and Cable Networks, Yahoo's multiple on AOL, and give the publishing a modest premium to the current newspaper multiples. What you get is low $20s. Sure, if private market values or public auction were used the sum of the parts could be 20-30% higher but no one is suggesting that Time Warner's segments are going private with the exception maybe of AOL and publishing.

The problem with Time Warner shares is that the two biggest drivers of value, Cable and AOL, are both out of favor. I think that cable will re-emerge as a profitable investment theme when 3Q and 4Q results are announced. If you want to play that, Comcast is a pure play. I think AOL has issues because it is a weak brand with poor demographics. That doesn’t mean that the weak 2Q and lowered guidance won’t be reversed in coming quarters. It does mean that AOL will at best mathc the growth rate of online advertising. It is not worth a premium valuation to Yahoo. Film, Publishing, and Cable Networks are mature. At times they will accelerate (as film is doing now due to a successful year against easy comps for Warner Brothers), but these businesses won’t move the stock valuation needle meaningfully.

Chris is right. Time Warner should keep buying back stock, dramatically raise its annual dividend, and focus on managing and investing in the different businesses. That might not be enough for impatient investors but over a 12 month or longer time horizon it is the best recipe to get the stock price up independent of a big rally in Comcast, Yahoo, and Google.

Posted by Steve Birenberg at September 18, 2007 11:15 AM in TWX