FYI...
http://multichannel.com/article/CA338507?display=Finance&pubdate=12/01/2003
The Parsons Project is Paring Debt
Time Warner's $2.6B Music Deal Continues Deleveraging Spree Getting Down to Below $20B
By Mike Farrell -- Multichannel News, 12/1/2003
Time Warner Inc. continued to make moves to pay down its debt, agreeing to sell its Warner Music Group to a group headed by former Seagram Co. Ltd. chairman Edgar Bronfman Jr. for $2.6 billion.
This is the fourth nonstrategic asset Time Warner has sold this year, and puts the entertainment giant well ahead of the debt-reduction plan mapped out by chairman and CEO Richard Parsons about 10 months ago.
Bold Stroke
At that time, Parsons was struggling with accounting investigations and poor performance at then-AOL Time Warner Inc.'s America Online Internet unit, as well as heavy debt. But Parsons made what at the time was a bold prediction — Time Warner would reduce its debt from a near-crushing $26 billion to about $20 billion by the end of 2004.
Parsons said he would get there through a combination of operating efficiencies and the sale of non-strategic assets.
He got there in record time.
So far this year, Time Warner has sold its CD and DVD manufacturing, packaging, distribution and merchandising unit to Cinram International for $1.05 billion in cash. In May, it announced the closing of the sale of its 50% interest in cable network Comedy Central to Viacom Inc. (which owned the other 50% interest) for $1.225 billion.
And in September, it sold its interests in two of its professional sports teams — the National Basketball Association's Atlanta Hawks and the National Hockey League's Atlanta Thrashers — to private investors for a combined $250 million.
Still, in a prepared statement, Parsons seemed to be sorry to see the music division go.
"Despite my personal fondness for the music business, as well as for all of our wonderful managers and music group employees, I believe that this transaction is clearly in the best interests of our company's shareholders," Parsons said in a statement. "Not only will it greatly enhance our financial flexibility, it also will enable us to pursue higher growth opportunities in our other lines of business."
$5B So Far
With the Warner Music sale, Time Warner has raised $5.125 billion in cash, all of which will go toward debt reduction.
Merrill Lynch media analyst Jessica Reif Cohen wrote in a research report last week that with the sale of Warner Music, Time Warner will be able to reach its debt reduction goal about one year early.
Reif Cohen estimated that the music division sold for about 11 times cash flow — based on annual cash flow of about $230 million to $240 million — a healthy multiple given the volatile state of the music business.
Reif Cohen estimated that Time Warner's net debt at the end of the year would be about $20.1 billion, or about 2.2 times cash flow — modestly below the media giant's own estimates of between 2.25 and 2.75 times cash flow.
But next year, assuming the close of the Warner Music deal and the internal generation of $4 billion in free cash flow (cash flow after interest payments and capital expenditures are made), Reif Cohen estimates that debt would plummet to $16 billion.
With that kind of breathing room, Reif Cohen said Time Warner would have ample liquidity to purchase the 20% equity stake Comcast Corp., owns in its Time Warner Cable division – acquired last year in the restructuring of the Time Warner Entertainment LP partnership.
Acquisitve?
Lehman Bros. analyst Vijay Jayant took it a step further, adding that Time Warner's success in lowering its debt could make the media giant underleveraged and in search of acquisitions.
In a research report, Jayant said that Time Warner could seek to unwind its Kansas City and Texas cable partnerships with Comcast Corp., or go after bigger clusters owned by Adelphia Communications Corp. or Cox Communications Inc.
"We believe Time Warner's balance sheet is now a weapon and a strength of the company as opposed to a key concern," Jayant wrote in his report.
Fulcrum Global Partners cable and media analyst Richard Greenfield was equally pleased with the Warner Music deal.
Although Greenfield characterized Warner Music as a small component of the overall company — Warner Music represents less than 2% of Time Warner's overall cash flow — it has been a black eye for the media giant because of its consistent earnings declines.
"With this sale and the sale of the music-manufacturing business earlier this year, [Time Warner] has eliminated its exposure to the poorly performing music industry, albeit retaining the ability to buy back in later on," Greenfield wrote in a research report.
According to the Warner Music deal, Time Warner has the option to buy up to 15% of the company at any time during the three years after the closing, and as much as 19.9% of the company under certain circumstances.
Fine Labels
Not that Bronfman is buying a dog. Warner Music is one of the largest music companies in the world, and generated about $4.3 billion in revenue last year. Among its major labels are such names as Atlantic Group, Elektra Entertainment Group, Rhino Entertainment, Warner Bros. Records Inc. and Word Entertainment. Warner Music also has about 800 artists in its stable, ranging from Madonna to Frank Sinatra.
The purchase marks the end of a long trail for Bronfman, who had been one of the bidders for Vivendi Universal Entertainment, the U.S. entertainment arm of Vivendi Universal S.A.
Bronfman sold Seagram's entertainment unit — Universal Music Group, Universal Studios and cable channels USA Network and Sci Fi Channel — to Vivendi in 2000. When Vivendi put the assets on the block earlier this year, Bronfman teamed up with private equity firm Thomas H. Lee Partners and Cablevision Systems Corp. in its bid for VUE. After an often-contentious five-month bidding process, Vivendi agreed to sell VUE to General Electric Co.'s NBC television unit for $14 billion.
After losing out in that process, Bronfman quickly set his sights on the music industry. A budding songwriter — he has written tunes for Celine Dion and Dionne Warwick — Bronfman's Lexa Partners teamed up with Thomas H. Lee Partners, Bain Capital, and Providence Equity Partners on the Warner deal.
Faith In Edgar
The Bronfman group also beat out a rival bid by international music giant EMI.
Despite its past troubles and uncertainty surrounding music piracy, Reif Cohen said in her report that the Bronfman team can turn the business around.
"We believe the partners involved in the bid are financially savvy and believe that if executed properly, any turn in the music business would suggest the acquisition was done at a rough valuation," Reif Cohen wrote in her report.
Bronfman will head up the music giant, which will retain the Warner Music name. And according to a prepared statement, Bronfman expects current Warner Music chairman and CEO Roger Ames and his team to stay on board.
"I personally look forward to working with Roger Ames and his outstanding management team to build on Warner Music's strengths, including its distinguished tradition of entrepreneurship and artist development. Together, we will continue to drive towards Warner Music's full potential," Bronfman said in a statement.
Still, Bronfman has had a spotty track record, at best. While he has been credited with helping to turn around Universal when he owned it, he is perhaps better known for losing a substantial part of his family's fortune in the Vivendi deal. When Bronfman sold Seagram to Vivendi in 2000 — which basically created VUE — he largely took Vivendi stock in the purchase, stock that has lost about 80% of its value since the deal was made.
Bringing Down Debt
The sale of its Warner Music Group division to a group headed by former Seagram Co. Ltd. exec Edgar Bronfman Jr., for $2.6 billion, is just the latest in a series of asset sales aimed at reducing Time Warner Inc.'s substantial debt to a manageable $20 billion. Below are the other asset sales the media giant has completed this year to reach that goal.
Category
2003 % Change*
Net Debt (3Q '03A)
$24.15
Sale of DVD/CD Mfg
($1.05)
Sale of Sports Teams
($0.25)
Sale of Warner Music
($2.60)
Net Debt (pro forma)
$20.25
Source: Lehman Bros. All figures in millions
