TIME: Almanac 1993/TIME Almanac 1993.iso/time/061791/0617202.000

Text File | 1992-08-28 | 5.8 KB | 123 lines

                                                                                BUSINESS, Page 51

CORPORATE FINANCE

A Novel -- and Complex -- Offer


Time Warner sparks a Wall Street furor with a debt-paring plan
that asks stockholders to pitch in more cash

By RICHARD BEHAR


    When Time Warner last week put forth a novel financing
plan designed to reduce its debt load, Wall Street responded
with boos. But an even more widespread reaction was a baffled
"Huh?" In an arrangement called a rights offering, the
entertainment and information firm, the parent company of TIME,
said it hoped to raise as much as $3.5 billion by selling
current stockholders the rights to buy 34.5 million new shares.
The price will depend on how many accept the offer.

    Time Warner's objective is to pare away some of the $11
billion in debt -- $3 billion of which must be paid off or
refinanced in 1993 -- that was incurred in the merger 18 months
ago of Time Inc. and Warner Communications. Since then the
company's top executives have been trying to form alliances with
other major companies, both for strategic reasons and to gain
a cash infusion. But the highly visible debt has evidently
created an appearance of vulnerability that has inspired
potential partners to demand terms Time Warner officials
consider unacceptable.

    The market's initial response to the company's innovative
attempt to shave its debt was to run for cover. In just a week,
Time Warner shares dropped 25 points, to under $95. "They're
calling upon the shareholders to buck up and pay down the
company's debt," griped Michael Kupinski, a
communications-industry analyst. "Why take the risk? You're not
going to know what you have to pay until afterward." Others
appeared to disagree, including Gordon Crawford, a money manager
at the Los Angeles-based institutional holder Capital Group,
which owns 12% of Time Warner's stock. "It makes long-term sense
for the company, and we will likely subscribe," Crawford told
the Wall Street Journal.

    Rights offerings, while commonplace in Europe, are
virtually nonexistent in the U.S. The last notable offering took
place in 1971, when AT&T raised $1.4 billion by successfully
issuing a new class of preferred stock to its shareholders.

    Time Warner's plan is more complex. Each participating
shareholder would receive 0.6 of a right for every current
common share. For each full right, the stockholder will have the
opportunity to pay $105 to enter the so-called "rights pool"
that contains the new stock. How many shares the stockholder is
given for that money depends on how many investors participate.
(At least 60% must take part for the deal to go forward.) If
only the minimum number participate, each $105 would buy the
stockholder 1 2/3 shares at a bargain price of $63 a share. At
the other extreme, if 100% take part, as happened in the AT&T
offering of 1971, the $105 investment would buy exactly one
share.

    Time Warner officials described the plan to 200 securities
analysts in a two-hour meeting that one Wall Streeter described
as "acrimonious." Explains Morris Mark, whose asset-management
company holds more than 200,000 shares of the company's stock:
"While I'm sure there's a lot of good intent and bright
imagination behind this plan, they've made an error. It is not
the right way to raise capital. It will create a conflict
between those with deep pockets and those without."

    The plan calls on stockholders to invest fresh cash to
prevent their current shares from being diluted by the issue of
the new ones, which will represent a 60% increase in the
current 57.8 million outstanding shares. If the shareholder is
unwilling or unable to put in the additional money, he can sell
the rights on the open market.

    The deal irked some shareholders who held stock in Time
Inc. when Paramount Communications made a failed bid for it in
1989. Time shares topped $182 then, but a year later fell as low
as $66; before the rights plan was unveiled, they had climbed
back to $120. "If you're a longtime Time Inc. shareholder, with
this plan you've once again been moved to the back of the bus,"
complains Richard Reiss, managing partner of Cumberland
Associates, an investment firm that holds Time Warner shares.

    Analyst Jeffrey Logsdon, of Seidler Amdec Securities in
Los Angeles, prefers to look at the bigger picture. "It will be
beneficial to Time Warner to have less debt," he says. "It will
reduce their interest costs and the perceptions about leverage.
The long-term investor will have to be patient. The stock drop
is a knee-jerk reaction to an unexpected event."

    Time Warner executives are restricted from publicly
discussing details of the deal until it is approved by the
Securities and Exchange Commission. But Wall Streeters who heard
the sales pitch said company officials contended that investors
would get a good deal. In return for putting up cash, maintains
Time Warner, stockholders would gain greater value for their
stake in the company because its debt would be slashed by up to
$3.5 billion. Even some analysts skeptical of the short-term
payoff for investors acknowledged that the plan, if it goes
ahead, would strengthen the company. "Overall, in the long term,
this is positive," said Christopher Dixon of Paine Webber.
"Time Warner is taking an active role in reducing its debt. Once
the dust settles and emotions fall by the wayside, longer-term
rational investors will recognize that Time Warner is positioned
to generate high returns."

    Until then Time Warner will have to brace for swings in
the company's stock price as investors debate the merits of the
rights offering, which is scheduled to begin June 17 if the SEC
approves. But nobody ever said high finance was for the faint
of heart.