The headline on the note initiating Pali Research coverage of Time Warner is an atetention-grabbing “We Would Vote For Icahn Unless TWX Moves Aggressively.” Analyst Rich Greenfield isn’t trying to align himself with the Icahn-Lazaard Report — “its unnecessarily aggressive valuation, gratuitous personal attacks, and questionable strategic assumptions (such as TWX would have been better off winning the AT&T Broadband auction) mitigated its effectiveness.” But he wants TW to make several moves in line with some of Carl Icahn’s demands, especially where he perceives AOL being held back.
AOL/TWC: “… we firmly believe the corporate connection between TW Cable and AOL needs to end. While a Time Warner Cable stub is a poor capital structure decision, consolidating both Time Warner cable and AOL appears to be hurting AOL operationally.” Greenfield notes areas where AOL appears to be held back including VoIP and broadband deployment. For instance, he was told as a potential AOL TotalTalk subscriber that he had to go to TWC for VoIP. Also, TWBC doesn’t mention AOL on its high-speed sign-up page.
Time Inc.: Greenfield urges a spinoff. “Given that we see little to no connection between Time Inc.’s magazines and the other divisions of Time Warner, we believe shifting 4+ times leverage (upwards of $5 billion) onto Time Inc., drastically cutting costs, and spinning the asset off would create meaningful value for TWX shareholders.”
AOL/Time: Greenfield notes a lack of synergy: No mention of Fortune or SI on the relevant AOL pages; no attention for the SI swimsuit edition and no sharing of video. (“We would have thought this would be the perfect event to drive traffic to AOL.com with traffic monetized through rich-media (video) advertising within SI video clips.”). The celebrity section of AOL is powered by People but the new TMZ.com venture doesn’t include the magazines.
Upshot for Greenfield: “Condensing Carl Icahn’s proposal into a single question, he is essentially asking investors, ‘Do you want things to stay the same or change?’ If it boiled down to that level of simplicity, we favor change (and we think investors will too), just not as far as Icahn, his investor group, Lazard and Frank Biondi are trying to push Time Warner. In turn, we believe Time Warner will recognize its precarious positioning and in turn, TWX management will begin the process of implementing parts of Icahn’s proposal (beyond a more rapid share repurchase plan) prior to the May 2006 annual meeting.”
Update: Greenfield sent out a second note urging clients to watch a very brief MarketWatch interview with Mark Ford, president and Publisher, SI. No mention of any efforts to work with other parts of TW.
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