Say this for Time Warner Chairman Steve Ross, he can cut a mean deal.
On Tuesday in Tokyo, Ross signed an agreement with Toshiba Corp., a big computer and electrical equipment company, and C. Itoh & Co.--one of Japan's biggest trading companies--in which the Japanese firms will pay $1 billion for a 12.5% interest in Time Warner's film studio and cable-television businesses, which include the Home Box Office and Cinemax channels.
They're paying a healthy price for a stake in expanding global television, a business that is part real promise and part illusion at this point.
At $1 billion, Toshiba and Itoh are paying almost 14 times the operating earnings and depreciation--the "cash flow"--of Time Warner's film and cable businesses, according to analyst Jeffrey Logsdon of Los Angeles' Seidler Amdec Securities. "That's 40% to 50% more than the stock market is currently paying for Time Warner assets," Logsdon said.
It's a good deal for Time Warner, the company formed by the 1989 combination of Time's magazines and cable properties and Warner's film and records businesses.
Time Warner will own 87.5% of the new company, plus a half interest in a new Japanese subsidiary for distributing film and cable-TV entertainment--while continuing to own all of the Time publishing and Warner records operations.
Time Warner stock rose $3.125 to $89.375 on the New York Stock Exchange Tuesday.
The Toshiba-Itoh deal gives Ross, 64, room to maneuver after months in which institutional investors and stock market observers saw his job threatened by the huge debt, about $8.9 billion, left over from Time's acquisition of Warner--a transaction in which Ross got $75 million for his shares.
"The sharks who were circling will now start applauding and the stock will go up," remarked Joan Lappin, president of Gramercy Capital, a money management firm that invests in Time Warner.
Ross plans to transfer most of the Time Warner debt to the new Entertainment company and to use a lot of the Japanese's $1 billion to expand cable operations in the United States, including a 150-channel movie and special events experiment it has been running in Queens, N.Y.
For their $500 million apiece, Toshiba and Itoh get a first call on Time Warner movies and HBO programs and perhaps some of the boxing matches Warner has been offering on pay-per-view TV.
Major Japanese companies worry that a communications boom is sweeping Asia and the world and that they will be left out because they lack programing.
It's a worry that has driven Sony to pay more than $3 billion for Columbia Pictures and Matsushita to pay more than $6 billion for MCA.
Both are finding that Hollywood can be a money drain.
Sony has paid millions for high-priced executives and expensive pictures.
Right now it has a lot riding on the release of "Hook," a Peter Pan adaptation in which director Steven Spielberg and stars Dustin Hoffman, Robin Williams and Julia Roberts hold such remunerative deals that it may be hard for Sony to make a profit.
"They'll need $500 million in grosses before Sony makes a dime on that thing," one Hollywood insider said.
Toshiba and Itoh, putting up less money for less ownership, and perhaps fewer headaches, are looking at the small screen.
Television is a fertile environment in Asia, with companies in Hong Kong, Taiwan, Thailand and other countries organizing satellite broadcasting. Itoh is a partner in JCSAT, one of Japan's satellites.
It soon could be beaming Time Warner films, although there are many up-and-coming Asian entertainers that Americans haven't yet heard of--new stars such as Wang Weihua, a rock singer in Beijing; Nor Azizol Mohamed, a teen heart-throb in Malaysia, and Taiwan singer and composer Kuo Tze.
Rising living standards across Asia--more leisure time, more television--are supporting the values in entertainment.
That's one reason Ross talked Tuesday of the Toshiba-Itoh deal bringing Time Warner fresh opportunities to get films into theaters and onto TV screens.
Finally, it was a good sign Tuesday that there was no real hand-wringing about "Japan buying Hollywood," as there had been in past deals.
Nobody said Henry Luce, the legendary founder of Time Inc., would be turning in his grave.
In fact, Luce might cheer. Born in China of missionary parents, Luce, who founded Time right after graduation from Yale, was a lifelong promoter of America's role in Asia. He coined the term the American Century, but he understood its global meaning.
Ross, who went to Paul Smith's Junior College, not to Yale, is far less lofty than Luce. But he too understands a growth market when he sees it.
Main Story: A1
Highlights of the Deal Time Warner places its Warner Bros., HBO and cable units into a limited partnership called Time Warner Entertainment.
Toshiba and C. Itoh each receive 6.25% of the new partnership, paying Time Warner a total of $1 billion.
Time Warner still owns 87.5% of the new partnership but tries to bring in other partners, always retaining control.
Time Warner retains its magazine, book publishing and record businesses.