PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Perhaps the linchpin in AOL Time Warner's 2003 plan to improve its flagging financial health and revive rock-bottom shareholder confidence is a long-ballyhooed proposal for a public offering of stock in Time Warner Cable. In 2002, the unit delivered $1.8 billion in revenue and $759 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).
The cable IPO would be an ideal solution for a pressing problem: Finding a way to pare down AOL's increasingly unmanageable $27 billion in debt. That need is so great, in fact, that AOL (AOL
) will pull the trigger as soon as it can on what could be the biggest IPO of the year. Wall Street's premier investment banks have been lining up to manage the offering -- a job that could generate as much as $200 million in fees, analysts say.
Yet as things are shaping up, the cable offering looks unlikely to produce the jackpot that CEO Richard Parsons would like. He wants to reap around $6 billion from selling what analyst John Brand of financial-analysis firm Dealogic in New York expects to be 15% to 20% of the cable unit. That would let it retain a majority of the unit's stock, even though, under a previous deal, AT&T Comcast (CMCSA
) will own 21% of Time Warner Cable.
NO OASIS. The betting among analysts, however, is that Parsons will have to settle for considerably less. And that would dampen any bounce in AOL's battered stock, which trades at around $10 as of Feb. 14, not far off its 52-week low of $8.70 and way below its 52-week high of $27.95.
One problem is that, given the struggling equity markets, the IPO market is as barren as the Sahara. "There really isn't [an IPO market] now, and there won't be for a while, in my opinion," says Steve Eskenazi, a venture capitalist for Walden VC in San Francisco. Dealogic says only two IPOs have launched this year, raising a modest $207 million, vs. the 97 in 2001 that collected $46 billion, and 86 last year that garnered $27 billion.
Another challenge for AOL is that the cable industry hardly looks like a model of opportunity. After many years of trying to break into the black, most operators are still reporting losses, thanks to the heavy debt they've incurred to modernize. Time Warner Cable is one of the better performers in the business, yet at the end of 2002 it announced a $10.5 billion noncash charge to reflect the declining value of its cable assets.
BAKE SALE. Those factors may combine to cut AOL's take from the offering, analysts say. Investment adviser Peter Cohan, of Peter Cohan & Associates in Marlboro, Mass., estimates that the IPO would raise $4.5 billion or less -- assuming that 15% is spun off to the public. "Time Warner Cable has 10.9 million subscribers. At a valuation of $2,850 per subscriber -- based on the $61 billion market cap of Comcast, with 21.4 million cable subscribers -- the value of Time Warner Cable would be $31 billion. So the value of a 15% stake would be about $4.5 billion," Cohan says.
Cohan notes, moreover, that even the $4.5 billion figure could be high, since Time Warner Cable is a distant No. 2 in the business and will likely carry about $8 billion in long-term debt when it goes public. Adds Eskenazi: "There's usually some sort of 'IPO discount' baked in, maybe around 15%. So to be conservative, say $4 billion for a 15% offering of the stock."
That's assuming investors don't become overly anxious about other concerns that surround the IPO. Parsons irritated analysts on Jan. 29 by warning that Time Warner Cable's EBITDA would grow more slowly in 2003 than in years past because programmers that promote their new shows on cable expect to advertise less this year. That news came as a surprise to influential analysts Tom Wolzein at Sanford & Bernstein and Richard Bilotti at Morgan Stanley. And it may have helped account for the 27% decline in AOL Time Warner's stock since then.
DELAYED DATE. Reluctantly, AOL has pushed back the projected date of the offering. Last summer, it suggested that it might happen in the first part of 2003. Then in January, AOL Chief Financial Officer Wayne Pace said it hoped to do the deal in the second quarter.
More recently, AOL has backpedaled again, saying the IPO will most likely happen later this year. "Parsons is in a bit of a bind on this one," says Porter Bibb, a managing partner for Technology Partners Holdings, a media-investment firm in New York. "It's very likely that AOL will get only about $4 billion from the IPO given the market conditions and the cable company's debt."
Parsons has said reducing AOL Time Warner's total borrowings to $20 billion by the end of 2004 is one of his highest priorities. The Time Warner Cable IPO was supposed to be the first step in that effort. Yet AOL's hopes for a quick cable windfall appear to be fading, meaning that Parsons could miss his goal -- and may have to look for other ways to bulldoze down his mountain of debt.
Copyright 2003, Bloomberg L.P.
Printer-Friendly Version
