Breaking up is hard to do. But in the case of Time Warner, it's simply the right thing to do.
News of the company splitting comes as no surprise. The cable piece of the business has been operating as a separate company for a while now. And investors have been clamoring for the company to make it official. Time Warner corporate announced plans for the split a month ago.
But now the full details of the split have been revealed. And the blogosphere is full of commentary on what a great deal it is for Time Warner corporate, namely the $9.25 billion dividend paid to its shareholders. But what about Time Warner Cable? How will the deal affect that part of the business?
In short, it might be the best thing that's ever happened to Time Warner Cable. Even though it's taking on additional debt to fund the one-time dividend payout to shareholders, which is on top of the $13.5 billion of debt it owed as of the end of the first quarter, it's still a smart move, said Sanford C. Bernstein & Co. analyst Craig Moffett.
"They are taking on the additional debt because they can," he said. "Their cash flow prospects are sufficiently strong to warrant an aggressive capital structure that was underleveraged as part of the bigger company."
As for the long term, Moffett believes being an independently run and traded public company gives it more flexibility and control. It also allows the company to ditch the weight of businesses like AOL that were an overall drag on its financials. In fact, Moffett believes Time Warner Cable has a better valuation without Time Warner Corporate than with it.
"The notion of any synergies between Time Warner corporate and Time Warner Cable were debunked a long time ago," he said. "But cable has always been the strongest part of the portfolio, and Time Warner Cable will likely benefit from the additional freedom."
Time Warner Cable is going to need that freedom to invest and maneuver through a new era in cable. The battle with the phone companies has only just begun. Cable companies, such as Time Warner, have proven they can compete in the broadband arena. They're giving the phone companies a run for their money on voice services. And now Time Warner Cable and other cable operators, such as Comcast, are gearing up to compete in the wireless market, too.
But getting into wireless won't be easy. It's going to take money. And it's going to take savvy executives who can strike meaningful and workable partnerships and execute on those plans. A major part of Time Warner's or any cable operator's success in wireless will be determined by whether these companies can figure out how to integrate services and products they already own into a wireless infrastructure.
Time Warner has already begun laying the groundwork. Most recently, it said it would invest $500 million to help Sprint Nextel and Clearwire build a nationwide 4G wireless network using WiMax. The company also owns a significant amount of wireless spectrum as part of the consortium SpectrumCo., which bid on and won licenses that blanket nearly 99 percent of the country in the 2006 Federal Communications Commission's Advanced Wireless Spectrum auction.
So far, Time Warner and the other cable operators haven't had a good track record in the execution piece. In fact, the 2005 joint venture with Sprint Nextel, called Pivot, has largely been a failure. Two and a half years after it was announced, Time Warner and Comcast have ducked out of the deal.
That said, I think cable and, in particular, Time Warner Cable have a shot at the wireless market. After all, who could have imagined 15 years ago that people would get home phone service from the same companies that also sell them MTV and HBO?