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With Sale, Time Warner Chief Sees a Dent in Debt

Chairman Richard D. Parsons says the media giant now can invest in other opportunities with more predictable returns.

November 25, 2003|Jeff Leeds | Times Staff Writer

Time Warner Inc. jumped into the music business in 1967 when entrepreneur Steve Ross purchased the first batch of entertainment companies that would form the core of today's media giant and its Warner Music division. As Time Warner grew into an entertainment conglomerate, music became one of its main cash cows and later a centerpiece of its star-crossed merger with America Online Inc.

Time Warner is still reeling from the AOL deal, and today its stock trades at about one-fifth of the price when the deal was announced in 2000.

On Monday, Time Warner agreed to sell its global music unit for $2.6 billion to Edgar Bronfman Jr. Time Warner Chairman Richard D. Parsons discussed his company's decision to sell off the music business.

Question: Time Warner has been a dominant force in music for 36 years. Why are you heading for the exits?

Answer: We needed to, in a nutshell, reduce the debt. We set a target for ourselves of getting down to about $20 billion [in debt] by the end of next year. We needed to have a growth profile that was as good, if not better than the other companies in the media and entertainment space. Music, which I personally like, is in a place right now where in the short term, it isn't going to be a high-growth, high-return business. It was creating a drag on the company's ability to grow. We made a decision that if we could strike the right kind of deal, we would do so.

Q: Despite the rampant piracy that is hurting music sales, Bronfman believes that the industry is near the bottom and that it will come back strong. If that's true, why are you selling?

A: I do believe in the future of the business. I don't know quite what it looks like, and I don't think anybody does. People love music and there are going to be [paying] consumers of music. How long that will take is the big ... question. In the interim, I run Time Warner. What does Wall Street love? They love growth; they love predictability. With the outlook for the [music] business for the next two, three, four years, you don't have either. I can use that money elsewhere with greater benefit to our shareholders.

Q: One reason Time Warner has so much debt is because of the AOL merger. Would you have sold the music business if you didn't have to raise cash to cut the debt load?

A: Hard to say. Who knows where we would be if we hadn't done the AOL deal? I will say this. Even if we didn't have the pressure on the balance sheet, a lot of the same strategic considerations still remain. [Music] is a business that will face its challenges over the next couple of years. The question from our perspective was, are there other opportunities to invest capital that would have ... more easily predictable returns?

Q: Not long ago, you were in talks with Bertelsmann about joining your recorded-music divisions into a joint venture that would have created the second-biggest music conglomerate. Why did those talks fall apart?

A: That deal, as it turned out from my perspective, was inferior to either of the two finalists we were looking at, each of which involved substantial cash and greater management clarity. Joint ventures are tough to make work. And there would've been no near-term benefit to the company.

Q: You then entered into talks with British music giant EMI Group about selling your recorded-music operation in a deal that would let you keep up to 25% of the merged company. You were close to a deal. What happened?

A: Once the Bronfman group got into the same economic zone as the EMI transaction, it became clear and compelling as to who was going to win. We'll be closed on this transaction in the next 45 to 60 days. With EMI, as fond as I am of EMI ... Chairman Eric Nicoli, and as much as I think our assets would work well together, that was a 12-to-18-month regulatory tussle.

Q: Other potential bidders were interested in your music business, including financiers Nelson Peltz and George Soros. Why didn't you sell Warner Music through a formal auction where you might have received a higher price?

A: We believe we had highly motivated, highly credible prospective bidders. We put them on the track some weeks and months ago and said, "Let's see if we can get to the end of the track." Toward the end, we had what you call bidders -- I call them shoppers -- come around and say, "We'd like to play." Frankly it was just too late.

Q: Time Warner still faces a number of potential problems. In September, two former executives of a Las Vegas software firm pleaded guilty to criminal charges that they cut secret deals with AOL in exchange for help in inflating their own firm's revenue. A Securities and Exchange Commission investigation is also underway. What will you focus on now?

A: The Department of Justice and SEC investigations are ongoing and we're continuing to cooperate.... We have to see that through to the end and manage that process appropriately. This [cash from Bronfman's group] has put us a year ahead of our own timetable. How we find investments that will both enhance and stabilize our prospects will be the question for Time Warner going forward.

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