Time For Some Results

When asked to describe the mood of his shareholders, Richard Parsons, president of Time Warner, thinks like Jerry Maguire. The film character, played by Tom Cruise, had a simple response to the empty promises and prevarications he encountered in business: Show me the money!

That, suggests Mr Parsons, could be the rallying cry for Time Warners shareholders. After all the promises that have been made this decade, the owners of the huge entertainment and media group are getting tired of waiting for their company to live up to the grand visions on which it was founded.

A strong performance from most of the groups businesses and a rally of its shares by a quarter this year seem to point to better times.

 

Furthermore, last years $6 billion purchase of Turner Broadcasting, owner of cable television networks such as CNN, may be beginning to yield results. Hitherto, the benefits of cross-fertilisation have conspicuously failed to materialise.

Most shareholders are tired of waiting. The company, created eight years ago from the merger of Time and Warner, has never made a profit. Its mountain of debt $18 billion at last count has never qualified as investment grade, leaving the group with a hefty interest bill. To cap it all, it still trades below $50 a share that Paramount offered for Time in 1989, before the company fell to a bid from Steve Rosss Warner.

In this era of shareholder value, such anomalies were supposed to have been swept away by investor activism. Yet Mr Gerald Levin, who took over as chairman on Ross death in 1992, has hung on with remarkable resilience.

The companys lack of profits is largely a result of its high interest bill, which ran to $1.4 billion last year. It must also contend with annual charge to profits on amortising the goodwill from its acquisitions $1.1 billion last year. Strip away such costs and one reveals a set of entertainment businesses that are, by and large, firing on all cylinders.

These range from Warner Bros, the most consistently profitable and stable film studio in Hollywood, to a publishing business that produces, by Parsons reckoning, 30 per cent of the US magazine industrys revenues and 40 per cent of its profits. Only the Warner music group with around a 20 per cent market share has been struggling.

Time Warner suffers the curse of many conglomerates: it would probably be worth more in pieces than as a whole. Of the Time publishing unit, Mr Parsons says with a distinct note of sourness: No one is ever interested in it. Wall Street never wants to know what publishing numbers are.

Mr Parsons now suggests that vision was over-optimistic. Owning all the hardware that it takes to run a cable system the wire and set-top boxes appears to have produced few synergies with the business of owning and producing the films and sitcoms that are pumped down the cable.

This realisation led to the purchase of Turner. The owner of a handful of well-known cable television networks, or stations, Turner offered a more obvious outlet for the content coming out of Warner Bros film and television studios.

It has taken Ted Turner, now Time Warners biggest shareholder and vice-chairman, to make this work in practice. Overriding the concerns of some Warner executives, he has pushed for Time Warners own networks to be given priority rights to Warner Bros films. This gives them preference over rival networks, such as NBC and ABC, which still account for the bulk of the US television audience.

Whatever tensions this has created internally, the move has certainly won fans on Wall Street. For the first time since Steve Ross died, theyve got someone with the weight to make these companies work together, says Jessica Reif, an entertainment industry analyst at Merrill Lynch.

The second reason to feel more optimistic about Time Warners prospects stems from the business that has been its biggest headache: cable. Much of the groups debt results from amassing cable systems, most of which are owned by a separate company, Time Warner Entertainment. This is itself 25 per cent owned by US West, a telephone company. Furthermore, revamping these systems with optical fibres and cable-modems has cost Time Warner more than $1 billion annually since 1994, a burden likely to continue for the rest of the decade.

Wall Street has been concerned that this hefty financial commitment might not bear fruit. In the early nineties, Washington extended its regulation of cable rates just when it was opening the market to competitors from telephone companies and satellite broadcasters. Both seemed destined to squeeze the industrys profits.

But these fears are beginning to look overblown. The government has changed tack, and cable rates will be deregulated by 1999. Also, competition has been less ferocious than feared. The telephone companies have largely turned away, more intent on fighting against a competitive assault on their own business. And while satellite broadcasters have scored some early victories, the biggest threat a joint venture involving Rupert Murdochs News Corp and Echostar, the US satellite company has collapsed. Other threats will follow.

There are good reasons to believe that Time Warners fortunes are looking up. But they remain counterbalanced by the groups debt. As Mr Parsons acknowledges, Any balance sheet can only take so much weight.

The delay is partly the result of the failure to conclude a deal with US West, the minority partner in TWE. For some time, US West has been negotiating an end to the relationship that would leave it with a chunk of the units cable systems and some of its debt. But its executives say they are under less pressure to complete a deal than Mr Levin. Time Warner is unwilling to sell out too cheaply.

If Mr Levin could seal a deal with US West, says Ms Reif, the ground would be prepared for a second possibly much bigger step. Time Warner might, she says, follow up with the sale of a majority stake in its remaining cable systems, or spin them off altogether.

If it managed to push its mountain of liabilities to one side, Time Warner would have the breathing space to demonstrate the healthiness of its other businesses. If the group can sustain the trend of cashflow it now has, it should be able to pull through without being forced to make further provisions, he says.

This positive outcome is based on a lot of ifs a word which Time Warners shareholders are understandably wary of. Many need convincing that the long awaited restructuring is actually about to happen.

When it occurs, it occurs, says one of time Warners biggest institutional investors. Until then, its all talk.