Is it time to take Time Warner (TWX) private? With its stock down 77% from its high and stuck in a trading range between $15 and $18 over the last three years, how can its investors be happy? Taking TWX private would lower its overhead and hand over company reins to private equity investors whose corporate strategies have generated shareholder returns that consistently outperform those generated by CEOs of S&P 500 companies.
Before launching into the rationale for taking TWX private, consider my biases. In January 2000, I commented in USA Today that the merger between AOL and Time Warner would likely founder on cultural differences. In January 2003, I took a look at TWX's debt contracts and concluded in BusinessWeek that it was in danger of violating some of the terms. And in December 2005, I appeared on CNBC's Closing Bell with Maria Bartiromo to argue that TWX would be worth more to shareholders if it was broken up.
Compared to its peers, TWX's stock market and financial performance leaves a bit to be desired. In the last year, TWX stock is up 1.3% while News Corp rose 8.6%, Comcast fell 6.2%, and Disney moved up 2.9%. While TWX's average five year revenue growth of 29% has been strong compared to its peers, its 6.6% net profit margin has been middling. For example:
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News Corp revenues grew 13% and its net margin was 11.4% -- almost twice TWX's
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Comcast's revenues grew 24% and its net margin was a much slimmer 4%
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Disney revenues grew a paltry 5% and its net margin was a TWX-beating 8.4%
TWX's future prospects and valuation do not suggest any reason to hope for the stock to rise. For example, analysts surveyed by Zacks expect TWX to earn $0.88 in 2006 and $1.03 in 2007, a 17% growth rate. At a P/E of 28, TWX may be over-valued. And compared to its peers, News Corp. is the only company that may be under-valued:
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News Corp., which trades at a P/E of 18, is anticipated to grow earnings at 24% to $1.04 in 2007
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Comcast, which trades at a P/E of 72, is expected to grow earnings at 42% to $1.11 in 2007
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Disney, which trades at a P/E of 21, is forecast to grow earnings at 12% to $1.63 in 2007
With such mediocre returns and paltry prospects, TWX shareholders could do far worse than to turn their investment over to private equity investors. Private equity firms have beaten the market over the long run. According to Venture Economics, they've generated 13.3% annual returns over the last 20 years -- handily beating the S&P 500's 8.6% return.
How might taking TWX private benefit investors? The answer depends on what assumptions you use. If private equity investors offered a 15% premium over the current market price, current shareholders at $17.48 would receive an immediate profit of $1.52. And shareholders who stuck around for TWX's restructuring under private equity management might earn a 15% average annual return if the company was taken public in five years. (Given that TWX's profits/employee are 52% of News Corp's $63,636, private equity firms have room to trim TWX's corporate girth). Under private equity management, that investor might hold shares worth $40.
If current management increases TWX's share value at a faster rate than it has in the last year -- say 3.5% per year -- that same investor's shares would be worth $20.76 -- roughly half what private equity's management would deliver.
Which would you choose?
DISCLOSURE: I am neither long nor short Time Warner shares. For more about me, click here.
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Reader Comments (Page 1 of 1)
5-03-2006 @ 10:21AM
CHARLES KOWAL said...
I FEEL MR PARSON IS HOLDING ON TO HIS JOB MAKEING 16 MILL A YEAR PLUS PERKS. WOULD YOU GIVE UP A JOB LIKE THAT. IF HE WAS INTERESTED IN HIS POOR SHARE HOLDERS HE WOULD SELL TO A HEDGE FUND OR BREAK UP THE CO
5-03-2006 @ 10:21AM
CHARLES KOWAL said...
I FEEL MR PARSON IS HOLDING ON TO HIS JOB MAKEING 16 MILL A YEAR PLUS PERKS. WOULD YOU GIVE UP A JOB LIKE THAT. IF HE WAS INTERESTED IN HIS POOR SHARE HOLDERS HE WOULD SELL TO A HEDGE FUND OR BREAK UP THE CO
5-03-2006 @ 10:47AM
Evan Jamieson said...
Mr Cohen needs to do his homework better before talking about how paltry the returns have been at TimeWarner. Fact is that most of the other stocks Mr Cohen mentions have also not moved much during the past year. Some media sector stocks he doesn't mention like Viacom and Liberty Media, have also stayed in their usual trading ranges despite spin offs and the like. Disney had a bit of a run after acquiring Pixar, but even that faded.
Media in general has been out of favor for a while now. Instead of panicking or trying to rush one company I'd advise people to continue being patient and build up their holdings in high quality media stocks.
Also I would remind long time shareholders that when TWX was first created the stock was slow to catch on in the market. It stayed under $50 a share for many years before moving up to $80-$100 range everyone likes to talk about. Don't miss the stock when it starts moving again.
E.J.