Media giant Time Warner, under pressure from investors, said on Wednesday that it would break off from its Time Warner Cable business, a move that will net shareholders a hefty dividend.
The widely expected separation will cost Time Warner Cable $10.9 billion, which will be paid out as a $10.27 per share dividend to shareholders. Time Warner will receive roughly $9.25 billion of the total owing to its majority stake.
Time Warner Cable expects to fund the one-time dividend through its existing revolving credit facility and $9 billion from a new, committed two-year bridge term financing from a syndicate of banks.
Time Warner President and CEO Jeffrey Bewkes said the separation gives Time Warner funds to make purchases, return cash to shareholders, or invest in remaining film, TV, Internet and publishing businesses.
Bewkes, who took over at the helm on 1st January 2008, said on a conference call that Time Warner no longer needed to own a cable operator to carry its movies and TV shows because it has established brands and more options for distribution.
Bewkes' predecessor, Richard Parsons, had fended off efforts by shareholder activist Carl Icahn to dismantle the New York-based company back in 2006.
"This is the right step for Time Warner and Time Warner Cable stockholders," said Bewkes. "After the transaction, each company will have greater strategic, financial and operational flexibility and will be better positioned to compete. We're bullish on Time Warner Cable's prospects, but its strategic goals and capital needs are increasingly different from those of our other businesses."
Glenn Britt, chief executive of Time Warner Cable, said: "In a single transaction we increase our strategic and financial flexibility, simplify our capital structure, enhance the public float and liquidity of our stock and return substantial capital to our stockholders."
Both companies said they aim to have ''solid investment-grade credit ratings'' after the transaction. However, Standard & Poor's (S&P) said today that it will likely reduce Time Warner's long-term debt ratings by one level to BBB, the second-lowest investment-grade rating, after the split. S&P said the expected downgrade is because Time Warner is losing the cable unit, its ''most predictable source of growth.''
Time Warner Cable, the second-largest US cable company behind Comcast Corp, accounts for about 40 per cent of its parent company's earnings. It became a publicly traded company in March 2007, although Time Warner maintained a majority stake in the company.
Under the transaction, Time Warner will increase its stake in Time Warner Cable from 84 per cent to 85.2 per cent, after which the latter will declare the $10.27 per share dividend. The increased stake includes 80 million newly issued shares of Time Warner Cable's Class A common stock in exchange for Time Warner's 12.4 per cent interest in TW NY Cable Holding, a subsidiary of Time Warner Cable. Analysts had earlier predicted Time Warner Cable would pay a dividend of between $5 and $6 per share.
Citigroup Inc. and Goldman Sachs Group Inc. are advising Time Warner on the transaction, along with BNP Paribas, Bank of America Corp., Deutsche Bank AG, and Wachovia Corp. Cravath, Swaine & Moore LLP is providing legal advice.
Time Warner Cable is getting financial advice from Morgan Stanley and legal advice from Paul, Weiss, Rifkind, Wharton & Garrison LLP. Evercore Partners Inc. and Skadden, Arps, Slate, Meagher & Flom LLP are counseling the company's independent directors.
Both the stocks were trading higher in opening trades.