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Jeff Bewkes' $9.25 Billion Dilemma


Many want Time Warner's CEO to use a big windfall to buy back shares rather than pursue acquisitions

Chief Executive Jeffrey L. Bewkes has sent some decidedly mixed signals to Time Warner's shareholders during his first eight months on the job. He has made a point of preaching the merits of prudence. Yet in his first big deal, Bewkes spent a hefty $850 million for a British social networking site that has yet to make a profit. Meantime, Time Warner (TWX) shares are down about a dollar since Bewkes took the helm.

So how Bewkes decides to spend a $9.25 billion cash windfall arriving later this year will be a crucial test in the eyes of investors. "He's supposed to be a fine businessman," says Morris Mark of Mark Asset Management, a Time Warner shareholder. "This will be his opportunity to prove it."

It's rare that a CEO gets to prove himself with a one-time lump sum of $9 billion and change. Time Warner will get the money as a special dividend from Time Warner Cable, a distribution arm due to be spun off as a freestanding business by yearend. Bewkes isn't letting on how he plans to deploy the money, telling investors only that he "will adhere to a disciplined framework."

Bewkes essentially has two choices: buy back Time Warner shares, or acquire something strategic.

First, the buyback scenario. Some shareholders, wary of Time Warner's track record on acquisitions, see repurchasing shares as the only way to go. During the past three years, the company has spent $22.5 billion buying back stock that represented about a quarter of all outstanding shares. The stock price today trades about 12% lower than it did when the repurchasing began (Bewkes was then co-chief operating officer). But Chief Financial Officer John K. Martin argues that the share price could be a lot worse today if the company hadn't taken action. And given the general decline in media stocks over that period, he may have a point. "Buying shares is the piece of the puzzle [Bewkes] needs to put in place," says Lawrence Haverty, a portfolio manager at GAMCO Investors, which owned 12 million Time Warner shares as of June.

LEERY OF BIDDING WARS

The right deal, however, could help Time Warner bulk up its programming and boost ad and licensing revenues, ultimately lifting the stock. One obvious target: Scripps Networks Interactive (SNI), a collection of cable channels that includes the Food Network and HGTV. With its targeted audiences, Scripps would be a nice complement to Time Warner's Turner holdings. But cable channels are commanding rich premiums these days: Look at the nearly $1 billion NBC Universal paid for Oxygen last year. Scripps is currently valued as high as $9 billion. But Bewkes might balk at spending his entire windfall.

If anything, some Wall Streeters believe Bewkes has become gun-shy. In May, he took a drubbing from investors after buying Bebo, a London-based social network popular among European youth. Soon after, Time Warner got into a bidding war with NBCU for the Weather Channel, only to pull out at the last minute. NBCU ended up spending $3.5 billion, considered a fair price. Time Warner executives characterized the decision to retreat as exercising discipline. But some investors say privately they were surprised Bewkes didn't hang in, given his desire to focus Time Warner more on content.

In the end, Bewkes may split the difference—using some of the cash to buy back shares while scouting overseas for smaller acquisitions. CFO Martin says Time Warner will consider deals for TV, Web, movie, and even video game holdings, chiefly in India, Eastern and Central Europe, and Latin America.

In the coming months, shareholders will be watching Bewkes closely—and not just because he has a big cash hoard to deploy. Also looming over the new CEO is the biggest question of all: what to do with AOL—the original deal from hell.


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