Time Warner Blinks

It agrees to meet Icahn halfway on his $20 billion buyback demand.
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Updated from 10 a.m.

Time Warner

(TWX)

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.

Revenue dropped 5% at AOL, as advertising revenue rose 28% but subscription revenue dropped 10%. AOL subscribers dropped by 678,000 sequentially and 2.6 million year-over-year in the U.S. to 20.1 million. Against all odds, AOL emerged in the latest quarter as a highly sought-after property due to the reach of its Web sites. The company has been in talks with

Google

(GOOG) - Get Report

,

Comcast

(CMCSA) - Get Report

,

Yahoo!

(YHOO)

and

Microsoft

(MSFT) - Get Report

over possible investments in AOL.

Revenue rose 13% from a year ago at Time Warner Cable, driven by a 13% rise in subscription revenue and a 4% rise in ad revenue. Time Warner Cable managed 10.9 million basic video-cable subscribers, which included nearly 1.6 million subscribers in unconsolidated joint ventures. Total basic video-cable subscribers grew 18,000 during the quarter. Digital-video subscribers rose 149,000 over the previous quarter for a total of 5.2 million. This growth represents the largest third-quarter increase since 2002. Digital penetration of basic video-cable subscribers reached 48% at the end of the quarter. Digital Video Recorder subscribers climbed 134,000 in the quarter to 1.3 million subscribers, representing 24% of digital video customers.

Residential high-speed data subscribers increased by 234,000 during the quarter for a total of 4.6 million, representing 24% of service-ready homes passed. This is the largest third-quarter net increase since 2002 and marks the third consecutive quarter in which net residential high-speed data subscribers increased by over 200,000. Digital Phone subscribers grew by 240,000 in the quarter for a total of 854,000, representing 5% of eligible homes passed.

Movie revenue rose 6% and networks revenue increased 10%, while publishing revenue inched ahead 3%.

Time Warner reaffirmed its expectation that its 2005 full-year growth rate in adjusted operating income before depreciation and amortization will be in the high-single digits, off a base of $9.9 billion in 2004. This expectation reflects anticipated revenue gains and margin expansion. In addition, Time Warner continues to expect that it will convert between 30% to 40% of its 2005 adjusted operating income before depreciation and amortization into free cash flow.

Time Warner said it bought back $809 million worth of stock between Aug. 3, when its $5 billion buyback plan was announced, and Oct. 31.