Time Warner will completely split with Time Warner Cable by the end of the year, in a $10.9 billion transaction to separate its content and distribution businesses.
The plan will give Time Warner (NYSE: TWX) a $9.25 billion dividend and end its two-decade ownership of programming assets, such as film and television, and the means to deliver that programming via cable. Such combinations of content and distribution have fallen out of favor on Wall Street as big media corporations compete with faster-moving Internet companies.
The long-expected move lifted Time Warner shares by 3.4 percent in pre-market activity on the New York Stock Exchange to $16.70. Shares of Time Warner Cable (NYSE: TWC), which also operates a nationwide broadband ISP business, Road Runner, rose 1.9 percent to $30.8.
Wall Street has clamored for the once-top media company to streamline its focus as a pure media content company and stem a stock price decline.
It will also leave Time Warner more time to determine what to do with its AOL Internet division, whose growth has been eclipsed by the likes of Google (NASDAQ: GOOG) and Yahoo (NASDAQ: YHOO). Time Warner has continued to discuss with Yahoo and Microsoft (NASDAQ: MSFT) a transaction to sell, spin off or merge its AOL division, sources have said.
“After the transaction, each company will have greater strategic, financial and operational flexibility and will be better positioned to compete,” Time Warner Chief Executive Jeffrey Bewkes said in a statement.
Investors will be eager to hear how Time Warner plans to invest the payout for the media company.
Time Warner Cable will also be free to pursue deals and investments using its stock. Time Warner and its cable division have long believed the capital structure requirements for cable operators are different from a more diverse portfolio of assets, making decisions difficult.
The separation will involve a series of steps: Time Warner will exchange its 12.4 percent interest in TW NY Cable Holding, a subsidiary of Time Warner Cable, for 80 million newly issued shares of Time Warner Cable’s Class A common stock, increasing Time Warner’s stake to 85.2 percent from 84 percent.
Time Warner Cable will then pay a one-time dividend of $10.27 per common share — a total of about $10.9 billion — immediately prior to completion of the separation. Time Warner will receive $9.25 billion of this dividend.
The new cable spin-off expects to fund the special dividend through its existing revolving credit facility and a $9 billion two-year bridge term loan from a syndicate of banks.
Time Warner also agreed to provide a commitment for a supplemental two-year term load of up to $3.5 billion to enable Time Warner Cable to repay the bridge.
Credit ratings agencies Moody’s and Fitch affirmed Time Warner and Time Warner Cable’s debt ratings on Wednesday.
Glenn Britt, Time Warner Cable CEO, said the company will maintain “solid” investment-grade credit rating.