Time Warner Blinks

Updated from 10 a.m.

Time Warner (TWX Quote) gave ground in its battle with activist hedge fund investor Carl Icahn, saying it would meet him halfway on his stock buyback demands.

The New York media giant posted a solid third-quarter profit, driven by gains at its cable TV operation, and reaffirmed full-year guidance. It also boosted its share buyback plan to $12.5 billion from the previous $5 billion. Icahn, noting the poor performance of Time Warner shares under current management led by CEO Dick Parsons, has demanded a $20 billion buyback and a full spinoff of the Time Warner Cable operation. Time Warner was mum on that issue, as well as on the status of talks with big online partners for a stake in AOL, on Wednesday.

On the conference call, Parsons stressed that the company would continue to build on strong operating momentum. He said execs would focus on three strategic opportunities: closing the acquisition of Adelphia, boosting returns to shareholders through the buyback and accelerating the transformation of AOL.

Ed Atorino, media analyst at Benchmark Capital, sees the buyback as a positive development. It "takes a step towards accommodating [Icahn] but is still not what he wanted," he said. Benchmark doesn't own shares in the company.

Time Warner has plans for a 16% cable play, but will wait until the Adelphia deal closes in the first half of next year before making any further commitment on that front, Parsons says. He says that the Adelphia deal expands Time Warner Cable's footprint, and will improve clusters and yield associated cost efficiencies. He intimated that once the earth was settled on those fronts that the company might revisit the case.

Time Warner executives declined to speak to any specifics related to ongoing discussions with a number of potential suitors to AOL. Asked how a partnership might help, Parsons said that "it is a priority for us to accelerate the transition of AOL business" and said that it could come in the form of an "enhanced relationship on the tech side or an enhanced relationship to drive more traffic."

Asked about what they might get in return for giving up a substancial part of the equity with a potential deal, Parsons stressed that despite speculation surrounding a partnership that "there may be none, or there may be one" and also said that Time Warner's leadership tends to be strategically and long term oriented.

Even with the good buyback news, Atorino says that "AOL is still not up to par. It's got its issues."

Asked about staffing reductions at Warner Brothers, entertainment chief Jeff Bewkes attributed a 5% cut largely to the digital transition and the joining of the home video and digital distribution units. As for other divisions, executives said it's budget season and the company is always looking at its cost base.

For the quarter ended Sept. 30, Time Warner made $897 million, or 19 cents a share, up from the year-ago $499 million, or 11 cents a share. Revenue rose to $10.54 billion from the year-earlier $9.94 billion. Analysts surveyed by Thomson First Call were calling for an 18-cent profit on sales of $10.38 billion.

Adjusted operating income before depreciation and amortization climbed 9% to $2.6 billion, reflecting strong double-digit increases at the networks and cable segments as well as gains at the AOL and publishing segments. This growth was offset partly by a decline at the filmed entertainment segment due to difficult prior-year comparisons. Operating income rose 60% to $1.8 billion, due primarily to the absence of the prior-year's charge to establish legal reserves of $500 million related to the government investigations.