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Wednesday, August 16, 2006

Time Warner Needs A Corpus Delicti

With Carl Icahn picking up a few more shares to take his stake in Time Warner to 1.5%, the issue obviously comes up again as to what the raider will do if the TWX stock price does not rise.

The new AOL plan to move away from paid subscriptions and toward internet advertising may be clever, and, it may work. But, the results of the experiment could be a year or two off.

Picking up Adelphi cable assets at the bankruptcy auction was a smart move for Time Warner cable, as is selling a piece of it to the public. But, everyone know that this is coming and it is "priced into the stock".

TWX shares are still going no place. At $16, the stock trades near the bottom of its range.

Wall St. wants a body. Something they can sink their teeth into. Something that will sharply increase margins, or, move revenue up faster.

The body of Jonathan Miller, AOL's CEO, will not be enough. Investors could argue that he has played well with bad cards. It is also clear that nothing of substance is ever done at AOL without the review of his superiors and the TWX board. Throwing him out gets the company nothing.

There are a few things that the company can do. One is a Disney rip-off. Cut the number of films done at the Film Entertainment unit of the company. Depending on how hot the unit's films are in any given quarter, revenue runs at between $2.2 billion and $2.8 billion. Operating income is about $250 million in a good quarter and $125 million in a poor one.

Disney cut 650 jobs and cut their production of films from 18 top 10. Wall St seems to like most of what Disney is doing. Its stock, at $30, is close to it 52-week high. Investors can't be sure, but the move may have saved close to $100 million, just in payroll.

The other division that seems to bug investors is the publishing operation, the foundation of the company going back to 1923. Revenue is running flat at about $1.3 billion a quarter. The operation has scores of small magazines that cannot be substantial contributors in a unit that has People and Sports Illustrated. The company has always prized its excellent, and expensive, editorial products. But, with the cost of paper, ink, and postage moving up keeping the unit's operating from falling from the current $230 million will be very tough. Although it would be heresy, some of the expenses at the unit need to go. And, that means people and perhaps underperforming magazines.

Hard as it may be, Time Warner may have to take $250 million out of annual costs, and maybe more. But, the body needs to be at least that big.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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