The other story at Time Warner
Wall Street is focused on the changes at AOL, but cable is the real business to watch.
By Stephanie Mehta, Fortune senior writer

NEW YORK (Fortune) -- Amid all the coverage around AOL's new strategy, you might not have noticed that Time Warner (parent of CNNMoney.com and Fortune) made another big announcement this week: The company, along with Comcast, completed its acquisition of Adelphia's cable-television assets in a deal that makes Time Warner's cable unit the nation's third-largest provider of multichannel programming behind Comcast and DirecTV.

Don't feel bad for missing the news. The Wall Street Journal wrote only a short brief about the long-anticipated closing -- and buried it on page B12.

Wall Street shrugged, too. On Tuesday, the day after Time Warner and Comcast announced the closing of the deal, Time Warner (Charts) stock inched up a few pennies - only to end the day down 25 cents a share.

Even Time Warner CEO Dick Parsons' effort to drum up some internal excitement for the transaction fell flat for some: His memo to employees heralding the news ended up in my "junk" e-mail folder.

It is too bad Time Warner's acquisition of part of Adelphia is getting such short shrift, because it is a sorely needed bright spot for the company. The cable unit gains more than 7.6 million homes for a total footprint of almost 28 million households.

Time Warner executives think these homes represent big revenue growth opportunities, since Adelphia customers haven't seen much in the way of new services since the company began operating under bankruptcy protection more than three years ago.

Time Warner, on the other hand, has been very aggressive about offering high-speed Internet and phone services; in the second quarter the cable unit posted a 15 percent increase in revenue on strong demand for broadband, phone and other add-on fare.

Time Warner and Comcast (Charts) also swapped some systems as part of the arrangement, giving both companies more contiguous cable systems; as a result of the deal, some 85 percent of Time Warner's cable assets reside in New York, Texas, Ohio, the Carolinas and southern California.

Such clusters make good economic sense for all the usual reasons: Time Warner can consolidate some functions, for example, and reach more customers with regional marketing.

And then there are all the usual cost-cutting measures that come with an acquisition, which analysts expect will boost earnings before taxes, interest, depreciation and amortization (the cable industry's measure of profitability) at Time Warner Cable. Bank of America analyst Douglas Shapiro estimates that cable revenue next year, factoring in Adephia, will grow 8 percent - more than any other Time Warner division - and cash flow for cable will rise 15 percent.

As an added bonus, the Adelphia deal redeems Comcast's interest in Time Warner Entertainment, one of the company's last remaining complex joint venture arrangements. By untangling the mess known as TWE (pronounced "twee") Dick Parsons can say he fulfilled one of the goals he set when he became CEO of Time Warner four years ago: He has indeed reduced the complexity of the company.

But perhaps the best thing about the completion of the Adelphia deal (for TWX shareholders at least) is that it allows Time Warner executives to start talking up its cable business. Here's why: When Time Warner and Comcast were trying to acquire the assets from Adelphia's prickly creditors as cheaply as possible, neither company wanted to inflate the valuations of cable companies, which have been severely depressed for the last few years.

Think about it: It has been a while since we've heard Comcast CEO Brian Roberts, the cable industry's de facto leader, railing about his company's stock price. (And, to be sure, Comcast stock has started to recover in the last six months. The stock now trades at more than $34 a share, the top of its 52-week range.)

Now that the deal is done - Time Warner and Comcast paid $12.5 billion in cash plus Time Warner Cable stock representing about 16 percent of Time Warner Cable's common equity - both companies may feel free to extol the virtues of cable.

Yes, the cable operators will face stiff competition from phone rivals AT&T (Charts) and Verizon (Charts), both of which are deploying video services, and worries over a price war between the industries has investors nervous. But a full-scale battle is still a few years away, and in the meantime well-run cable companies have some opportunities to keep growing.

That may not grab as many headlines as what's happening over at AOL, but it is one of the better stories Time Warner has to tell.

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