I've been a fan of Carl Icahn for a while, but I have to say I'm a bit disappointed in the stance he's taking on Time Warner (TWX). But let me be clear, I agree with Icahn on one critically important issue: Time Warner shares are a buy here.First off, let's summarize what Icahn has been suggesting to Time Warner's management and the actions he's taken: In August, he announced he was buying shares of Time Warner and had, alongside several hedge funds, accumulated 2.6% of the company. At the time, he specifically suggested that Time Warner increase its share-buyback program to $20 billion from $5 billion and completely spin off the cable division, as opposed to the 16% sliver that the company plans to spin off to the public. A week later, he met with Dick Parsons, the CEO, and commended Parsons' stewardship on the company. Then on Tuesday, Oct. 11, he sent a more aggressive letter to the company in which he disclosed that his group now owns 2.8% of Time Warner shares, and he then launched a host of criticisms:
- He accused the company of selling Warner Music Group (WMG) at a fire-sale price.
- He accused the company of selling its 50% stake in Comedy Central at a fire sale price.
- He asked the (reasonable) question: If 12 of the 15 Time Warner directors voted for the disastrous AOL merger, why are many of these directors still on the board of Time Warner?
- He criticized the building of Time Warner's new headquarters in Manhattan's Columbus Circle, calling it "lavish."
WMG and Comedy Central Sold at Fire Sale?In retrospect it's easy to say these two were sold on the cheap. But Parsons, probably correctly, saw the long-term writing on the wall of the music industry and decided to bail before it got any worse. Music sales were declining and Time Warner's stock was certainly not being helped by having WMG under its umbrella. So regarding WMG: Good riddance. Comedy Central is a tougher call. Let's not forget that Comedy Central was created in the courtroom when Viacom ( VIA.B) and Time Warner were engaged in a bitter lawsuit involving the Comedy Channel (owned by TW) and the Hah! Channel (owned by Viacom) back in the 1990s. Parsons has been actively trying to simplify the structure of Time Warner's units (getting rid of the other shareholders of Time Warner Entertainment for instance, and cleaning up cable by spinning it out) and this was part of that strategy. I was definitely surprised he sold off Comedy Central, because it's been somewhat of a gem in the cable lineup, particularly in the past few years. However, this was part of his overall strategy of cleaning up Time Warner.
Directors and AOL?The implicit question here is: Should Parsons be fired, since he voted for the deal.
The New HeadquartersPersonally, I'm glad they did it. I hate the statue that's right between the escalators going up to the Borders bookstore but I love the bookstore and the food in the Mandarin is great. Keep it up! Every division of Time Warner is now undervalued compared with its peers. Filmed entertainment, including Warner Brothers and NewLine, is going strong and there are more Batman and Harry Potter movies coming out, among others. And yet, Time Warner's stock trades at 10 times EBITDA, and pure plays like Pixar and Lion's Gate are at 15 times and 23 time respectively. Cable, if it represented the entire business at 10 times EBITDA, is cheaper than Comcast ( CMCSA), which trades at 11.5 times, and Cablevision ( CVC) at 19 times. I am a big fan of the Networks division, having formerly worked at HBO (and met my wife there). And finally, AOL is a rough gem that is starting to shine. Although subscription revenue is going down, Parsons has been orchestrating a soft landing while turning around the advertising revenue. Overall net income is up, climbing to $692 million in the six months ending June 30, 2005, from $553 million in the six months ending June 30, 2004. AOL, with a TWX multiple, is trading at one-third or less the multiples of Yahoo! ( YHOO), Google ( GOOG), or even Internet laggards like cNet ( CNET).
- The company is buying back $5 billion of its own shares here.
- It is paying a dividend for the first time since the merger.
- It continues to clean up debt structure and ownership structure.
- The AOL turnaround is going to unlock significant value.
- And finally, Parsons has stated that in the next few weeks he's going to announce new shareholder initiatives.