Media a $1 Billion Pacific Alliance

By John Greenwald

In a deal that has been long anticipated, Time Warner Inc. last week wrapped up a partnership with electronics maker Toshiba and trading company C. Itoh. For $1 billion, the Manhattan-based media giant, parent company of TIME, agreed to sell the two firms a combined 12 1/2% stake in its movie, cable TV and Home Box Office operations.

The new venture, to be called Time Warner Entertainment, will take on $7 billion of Time Warner's $8.8 billion debt, which had been a concern to investors. Time Warner's book, magazine and music divisions will shoulder the remaining $1.8 billion, after it is reduced by some or all of the proceeds from the deal. In a related transaction, Time Warner plans to acquire the 18% of its cable-TV subsidiary American Television and Communications that it does not already own in exchange for preferred stock that will be worth $75 a share in three years.

While the immediate benefits of the alliance are financial, Time Warner executives have their eyes on improved access to Japanese markets and new technologies. "It's strictly strategic," chairman Steven Ross said of the deal. "The financial side comes along with it." Time Warner expects its new partners to help it quadruple the approximately $175 million in annual film and TV revenues that the company now earns in Japan. "This is a market- busting-open opportunity," said N.J. Nicholas, co-chief executive of Time Warner. The venture will also give Time Warner direct access to cutting-edge technologies like interactive television, which Toshiba and other companies are developing. "At a minimum, we'll simply be a lot more knowledgeable," Nicholas said.

The Japanese anticipate major benefits too. C. Itoh, which initiated the joint-venture talks last year, plans to expand its cable-TV operations in Japan by drawing heavily on Time Warner's expertise. As the world's largest trading company, C. Itoh (sales: $151 billion) already manages cable firms, runs sports and music channels and owns a 40% stake in two communications satellites. But that still leaves it plenty of room to grow in Japan, where only 18% of the households are wired for cable -- most of them in rural areas with poor regular-TV reception. "Cable is going to be a big business here, but it will develop slowly," says Mitsuhiro Kitabatake, a top C. Itoh corporate planner.

Cable also fascinates Toshiba (sales: $35 billion), which C. Itoh brought into the deal. Toshiba executives warmed to the venture after touring an advanced 150-channel system that Time Warner is building in New York City.

Wall Street generally applauded the agreement, which follows a controversial Time Warner stock rights offering last summer in which the company raised a record $2.6 billion to pare down its debt. Buoyed by the new alliance, the price of Time Warner stock surged 5 5/8 a share last week to close at 90 3/8. "A lot of people had been fretting over Time Warner's balance sheet," said John Reidy, who follows the media industry for Smith Barney. "This helps get the debt monkey off Time Warner's back."

Having concluded the Toshiba-C. Itoh deal, Time Warner is now expected to look in the other direction -- Europe -- to form new strategic alliances. "And that," vows Ross, "is exactly what's going to happen." The company could sell an additional 7 1/2% stake in Time Warner Entertainment and still retain an 80% interest -- the minimum level of ownership that would permit it to deduct any losses from the partnership from Time Warner's own taxes.

With reporting by Barry Hillenbrand/Tokyo