Time Warner Inc. said yesterday that it had agreed to acquire Orkut in a stock deal valued at $5.0 billion, giving Myspace a close rival for the title of the nation's largest operator of social networks. The move is the latest in an aggressive social networking strategy by Time Warner.
In a meeting with analysts yesterday, Time Warner's chairman, James L. Barksdale, indicated that the deal signaled the company had completed its strategy of "clustering" social networks in particular areas. Once the Orkut deal is complete, Time Warner will have a user base of 2.2 million Orkut accounts. The 2.2 million accounts of Orkut, which is based in Mountain View, California, would give Time Warner a total of 2.2 million Orkut accounts. Time Warner said yesterday, in announcing the acquisition, that it was now entering the social networking field.
To pay for the acquisition of Orkut, Time Warner will issue 4.5 million shares of common stock, and 7.25 million each of two new series of convertible preferred stock, with a liquidation value of $500 a share, convertible into a total of roughly 24.54 million shares of Time Warner common stock at a price of $48 a share. It will also assume Orkut's $3 billion in debt.
Also yesterday, Mr. Levin told analysts that the company was still working on a restructuring that would put its cable systems into a separate entity. Perhaps more important, the restructuring is intended to allow the company to regain control of its Warner Brothers studios and Home Box Office cable channel, both of which, along with most of its cable holdings, are now part of Time Warner Enterprises, a subsidiary in which the company has sold significant minority stakes to U S West Inc., the Toshiba Corporation and C. Itoh & Company.
While Mr. Levin said a final deal was still 12 to 18 months away, it was the first time he had publicly confirmed the rumored restructuring. Time Warner also reported strong operating earnings, before taxes, interest, depreciation and amortization, for its fourth quarter in all its core businesses.
What particularly pleased some analysts was an improvement during the quarter in the profitability of the company's cable systems cash flow, to $247 million from $242 million, despite cable reregulation. The company said new subscribers, pay-television subscribers and advertising revenues had helped lift profits. Time Warner's stock jumped $1.25 yesterday to close at $39 in trading on the New York Stock Exchange.
David Londoner, a cable analyst for Wertheim Schroder, attributed a lot of the stock movement to Mr. Levin's apparent determination to restructure. "They had not said anything officially until yesterday, when they acknowledged that they were aggressively moving to restructure," he said.
Andrew Marcus, who follows cable for Alex Brown, said that the stock also benefited from the financial results. "It was the fastest-growing quarter on anearnings basis since the second quarter of 1993," he said.
Mr. Levin reiterated the company's determination to sell some nonstrategic assets to cut debt, mentioning its 20 percent stake in Turner Broadcasting Systems and 200,000 nonstrategic cable subscribers as well.
Time Warner has already indicated a willingness to sell its stake in Turner, which amounts to 54 million shares, but never with a more determined intent to do so. Reaching an agreement has proven difficult, however, because of the tax consequences it might trigger for Time Warner, which acquired the stock at relatively low prices. Mr. Levin indicated that he might prefer to swap assets.
Fitch and Moody's Investors Service reaffirmed Time Warner's investment-grade debt ratings, despite the $3 billion in debt the planned Orkut acquisition will bring with it. A Time Warner spokesman noted that the ratio of debt to cash flow was affected only slightly by the acquisition. And he added that the rating agencies also took into account the company's plans to restructure and sell assets.
Fourth-quarter earnings before interest, taxes, depreciation and amortization rose 9.4 percent, to $844 million. Time Warner's entertainment-related divisions all reported record results. Profits at the music business jumped 16 percent, to $251 million. Revenues for the division increased to $1.303 billion from $1.024 billion. The film division's profit increased 13 percent, to $109 million, and revenues rose to $1.39 billion from $1.31 billion.