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February 7, 1996

Strong Results Lift Shares of Time Warner

By GERALDINE FABRIKANT

NEW YORK -- Time Warner Inc. cheered Wall Street on Tuesday with stronger-than-expected financial results and indications that it was closer to resolving its battle with U S West over the ownership of Time Warner's cable operations.

Time Warner's stock jumped $2, to $43.50, on the New York Stock Exchange.

"The company showed better momentum than any of its competitors and a potential resolution of the Time Warner U S West conflict," said Jessica Reif, a media industry analyst at Merrill Lynch & Co.

Time Warner said its net income for the fourth quarter jumped to $33 million, from $12 million in the comparable period a year earlier, while its earnings per share, which reflect payments of preferred stock dividends, slipped to 1 cent from 2 cents.

Still, the latest per-share results were better than Wall Street forecasts of break-even to a loss of about 2 cents.

Moreover, an important measure of Time Warner's performance -- its operating cash flow or earnings before interest, taxes, depreciation and amortization -- rose 26 percent in the quarter, to $1.038 billion.

Those results include Time Warner's 75 percent stake in Time Warner Entertainment, which includes the Warner Brothers film studio, Home Box Office and the bulk of the company's cable systems.

The company said all its chief operations posted gains.

The other 25 percent of Time Warner Entertainment is owned by U S West, which has sued to block Time Warner's pending acquisition of Turner Broadcasting System, saying such a deal needed approval by U S West.

Time Warner had told U S West that it wanted to restructure the deal so that U S West would give up its stake in HBO and Warner Brothers. U S West, in turn, has sought a controlling stake in the cable systems.

Tuesday, Richard D. Parsons, president of Time Warner, told analysts that there had been discussions at the highest levels of the two companies about trying to keep the Time Warner cable operations together.

Analysts interpreted that as progress since there had been reports several months ago that that top-level executives from the two companies were not even speaking.

Some experts view the lawsuit by U S West, which is scheduled for trial starting March 13, as an attempt to increase its leverage in the negotiations. Ed Hatch, who follows Time Warner for UBS Securities, echoed the views of others in saying that resolving the ownership and the dollar amount of U S West's interest in Time Warner Entertainment would likely resolve the suit, which was primarily seen as a negotiating tactic.

But the status of the Time Warner-U S West talks remains far from clear. An executive close to U S West, the regional telephone company based in Engelwood, Colo., said Tuesday that the company was not in "negotiations" for a settlement.

Indeed, U S West was sufficiently concerned about precisely what Mr. Parsons had said to have put in a call to Time Warner asking for clarification. A spokesman for Time Warner said Tuesday that the company had not meant that a settlement of the lawsuit was being discussed, only the restructuring of Time Warner Entertainment.

One media expert who spoke on the condition of anonymity said he foresaw the two sides keeping cable operations intact but splitting ownership on a 50-50 basis and then, in a second step, either bringing in an outside investor -- possibly AT&T -- or selling stock to the public so that the two companies would not have to invest more to cover capital expenditures

In its financial report, Time Warner said its revenue, including Time Warner Entertainment, rose 11.5 percent, to $5.120 billion. For Time Warner Inc. alone, revenue rose 3.3 percent, to $2.29 billion.

Analysts were particularly heartened by the performance of Time Warner's cable division. In the fourth quarter, excluding the new systems acquired last year, the unit's operating cash flow rose 12.5 percent, the company said, fueled by new subscribers and higher rates.

The company's music division reported an 18 percent jump in earnings, to $294 million, even though sales slipped slightly to $1.227 billion, in part because of the closing of some direct marketing businesses and the sale of the company's 50 percent stake in Interscope Records.

Meanwile, the film entertainment business's operating cash flow rose 27 percent, to $121 million.

Following the company's cable operations is complicated because Time Warner Entertainment owns most of them, which generated cash flow of $355 million, while the cable systems that are part of the parent company produced cash flow of $45 million. But what analaysts focused on was a 12.5 percent rise in cash flow.

"It has not reached double digits until this quarter," a company executive said.

Cash flow at the publishing division rose rose more than 11 percent, to $175 million. The results were driven mostly by growth in magazine advertising among such titles as Sports Ilustrated, People and Fortune.

Meanwhile, Turner Broadcasting System also reported gains in its operating cash flow in the fourth quarter, although its net income slipped 26.9 percent.

Turner said it had cash flow of $142 million compared with $137 million in the year-earlier period. Net income totaled $19 million, or 7 cents a share, compared with $26 million or 9 cents a year earlier. Revenue jumped 11 percent to $923 million.

Although Turner's operating cash flow rose, its operating profit fell to $79 million from $96 million.


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