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Thursday, January 15, 2009

Time Warner Takes $25 Billion Hit
Aol On Deathbed

Responding to past problems and the future perils of the economic downturn, Time Warner Inc. attempted to clear its slate by writing down $25 billion of assets to account for the tumbling value of its cable, publishing and AOL businesses.

The move, coming as the advertising outlook sours, could signal more write-downs for media and cable companies. After a rash of acquisitions at peak prices, companies in those industries are having to scale back accounting values in the now-sullen climate. The media industry also faces secular declines in areas such as newspapers, broadcast television and radio, which are being ravaged by ad declines.

Time Warner CEO Jeff Bewkes has signaled a shift to focus more on the TV and movie businesses.

Coupled with weaker-than-expected advertising revenue,Time Warner's fourth-quarter write-down is expected to swing the company to an annual loss for 2008 -- its first in six years.

Time Warner Cable Inc., whose shares have fallen 50% in the past couple of years, represented the bulk of the non-cash write-down, at nearly $15 billion. The news also highlights the lingering effects of Time Warner's disastrous 2001 merger with AOL and a gloomy outlook for the magazine-publishing business.

Time Warner has made a slew of acquisitions since the company's last major write-down in 2002 for the value of AOL and its cable systems. Time Warner Cable spent about $9 billion of cash and 16% of its equity acquiring assets from rival Adelphia in 2005. AOL also has been on a buying spree in its bid to revamp itself as an ad-based company. Investors chided AOL last year for the steep $850 million price tag of its Bebo acquisition.

Cable-TV company Comcast Corp. similarly plans to write down its stake in wireless broadband company Clearwire Corp., whose shares have fallen about 60% in the past 12 months, said people familiar with the situation. Last October, CBS Corp. recorded a $14.1 billion charge, largely for the shrinking value of its local television and radio stations. "We believe that similar announcements from other media companies could be forthcoming," said UBS analyst Michael Morris.

Time Warner's write-down says a lot about the challenges that face Chief Executive Jeff Bewkes. Mr. Bewkes has signaled a shift to focus more on the TV and movie businesses and less on non-content assets such as Time Warner Cable, which he expects to spin off by the end of the current quarter.

But he still needs to find long-term solutions for AOL and publishing. Time Warner CFO John Martin, speaking at an investor conference, said the company is still interested in finding AOL a partner, after on-off talks with potential candidates, but noted the current climate "is not conducive to" quick action.

Time Warner rang more alarm bells about the advertising climate, saying "the economic environment has proved somewhat more challenging" than previously expected, particularly at its AOL and publishing units. The company scaled back its operating projection for 2008, saying it now expects adjusted operating income before depreciation and amortization to be $13 billion, up 1%, a drop from its previous forecast of a 5% increase.

Time Warner shares were down 6.3% at $10.29 in 4 p.m. composite trading on the New York Stock Exchange, while Time Warner Cable stock was down 4.8% at $21.56.

In addition to the write-down, Time Warner will record charges of as much as $380 million in the fourth quarter, including as much as $60 million from the restructuring of a lease for floors in its Time & Life Building in Manhattan held by Lehman Brothers Holdings Inc.; a $40 million increase in its credit-loss reserves for bankruptcy filings by retail customers; and $280 million for a court judgment against its Turner Broadcasting System Inc.

Time Warner still expects cash flows for 2008 to total $5.5 billion, matching its outlook provided in November, because of strong performances from its film division and its cable-television networks.

Time Warner was expected to come under pressure to write down assets as it carried over $42.5 billion in goodwill on the books for 2008. Mr. Martin said he expects no "adverse impacts" from the write-down, noting there are no debt covenants or tax implications that will lead to more financial pain.

The Time Warner Cable write-down reflects the decline in the market value of the company, a drop in the value of its franchise rights and lowered expectations for cash flow amid increased competition and higher borrowing costs. Time Warner Cable said it also plans to take a charge of about $350 million related to its investment in Clearwire.

Time Warner is to report fourth-quarter earnings Feb. 4.