Time Warner Spins Off Time Warner Cable, Leaving TWC Fully Independent But with a $9 Billion Debt

| May 23, 2008 | Digital Home - U.S | Competitive Update

| Analyst: Larry Hettick

Current Perspective: Positive
Vendor Importance: Moderate
Market Impact: Low

Event Summary

May 21, 2008 – Time Warner Inc. and Time Warner Cable Inc. have announced that their respective boards of directors have approved an agreement that will result in the complete legal and structural separation of the two companies. Under the terms of the agreement, Time Warner Cable will declare a one-time dividend of $10.9 billion to its stockholders, payable just prior to separation and Time Warner will receive $9.25 billion of Time Warner Cable’s dividend. Time Warner Cable expects to fund the one-time dividend through its existing revolving credit facility and $9 billion from a new, committed two-year bridge term financing from a syndicate of banks. The transaction is expected to close in Q4 2008, contingent on a favorable IRS ruling, customary regulatory reviews, and local franchise approvals.

Analytical Summary

• Current Perspective: Positive on the agreement for Time Warner, Inc. and Time Warner Cable (TWC) to completely separate the two companies because the arrangement will leave TWC free to focus entirely on its own operations without any obligations to its parent company. Time Warner, Inc. currently holds 84% equity interest and 90.6% voting interest in TWC. TWC has been the cash cow for Time Warner, Inc. and in the long-term, the separation leaves TWC free to use its cash to better its competitive position. However, access to the cash may be delayed because the agreement stipulates that TWC will pay Time Warner, Inc. a $9.25 billion dividend prior to separation, and the dividend will be financed by TWC using a committed two-year bridge term financing from a syndicate of banks. However, the loan will likely be repaid through long-term debt, equity, or both.

• Vendor Importance: Moderate to TWC because it is obligated to repay a $9.5 billion debt incurred to finance the dividend and the additional debt may constrain the company from new growth opportunities. Time Warner Cable reported a net income of $1.123 billion in 2007 and $242 million in Q1 2008, and it already carries $13.226 billion in long-term debt reported in Q1 2008. By comparison, Comcast had a Q1 2008 net income of $732 million and long-term debt just over $30 billion. TWC will need to manage the loan conversion carefully at a time when financial markets are in turmoil, which could detract from its near-term ability to invest in the kinds of ventures it will need to differentiate its offers with increased competition from Verizon and AT&T.

• Market Impact: Low on the Digital Home Services market because large long-term debt loads are standard fare for MSOs, and Time Warner Cable is not expected to significantly modify its product portfolio in the near term based on its soon-to-be independent status.

Recommended Competitor Actions

• Verizon and AT&T should avoid the temptation to cast fear, uncertainty, and doubt about Time Warner Cable’s financial future because TWC management has already demonstrated it can deliver solid financial results. Rather, AT&T and Verizon should focus on winning with better services and product features against TWC.

• AT&T and Verizon should continue to expand their video initiatives, including IPTV, through their fiber networks, offering faster broadband speeds and more integrated video services. AT&T must hasten deployment of its U-verse services to be a credible threat with IPTV. Verizon should emphasize its superior video picture quality, better HD channel count, and Internet connection speed advantage.

• AT&T and Verizon need to look to other revenue sources like offering video content over their Internet connections, and creating ad-supported Internet services Web portals. While Comcast has taken a leadership position with its Project Infinity, TWC and other MSOs are not far behind alternative ways to increase ARPU.

• AT&T and Verizon should build on their strength with existing wireless services as a bundle element, since TWC and former Pivot partners don’t have a wireless play until the MSOs start to deliver services under their new agreement with Clearwire. AT&T and Verizon also need to speed up their 4G wireless infrastructure upgrades or they may soon be at a disadvantage to TWC and other Clearwire partners.

CLIENTS ONLY

Competitive Positives and Concerns

Recommended Vendor Actions

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