Corporate Finance

By RICHARD BEHAR

When Time Warner last week put forth a novel financing plan designed to reduce its debt load, Wall Street responded with boos. But an even more widespread reaction was a baffled "Huh?" In an arrangement called a rights offering, the entertainment and information firm, the parent company of TIME, said it hoped to raise as much as $3.5 billion by selling current stockholders the rights to buy 34.5 million new shares. The price will depend on how many accept the offer.

Time Warner's objective is to pare away some of the $11 billion in debt -- $3 billion of which must be paid off or refinanced in 1993 -- that was incurred in the merger 18 months ago of Time Inc. and Warner Communications. Since then the company's top executives have been trying to form alliances with other major companies, both for strategic reasons and to gain a cash infusion. But the highly visible debt has evidently created an appearance of vulnerability that has inspired potential partners to demand terms Time Warner officials consider unacceptable.

The market's initial response to the company's innovative attempt to shave its debt was to run for cover. In just a week, Time Warner shares dropped 25 points, to under $95. "They're calling upon the shareholders to buck up and pay down the company's debt," griped Michael Kupinski, a communications- industry analyst. "Why take the risk? You're not going to know what you have to pay until afterward." Others appeared to disagree, including Gordon Crawford, a money manager at the Los Angeles-based institutional holder Capital Group, which owns 12% of Time Warner's stock. "It makes long-term sense for the company, and we will likely subscribe," Crawford told the Wall Street Journal.

Rights offerings, while commonplace in Europe, are virtually nonexistent in the U.S. The last notable offering took place in 1971, when AT&T raised $1.4 billion by successfully issuing a new class of preferred stock to its shareholders.

Time Warner's plan is more complex. Each participating shareholder would receive 0.6 of a right for every current common share. For each full right, the stockholder will have the opportunity to pay $105 to enter the so-called "rights pool" that contains the new stock. How many shares the stockholder is given for that money depends on how many investors participate. (At least 60% must take part for the deal to go forward.) If only the minimum number participate, each $105 would buy the stockholder 1 2/3 shares at a bargain price of $63 a share. At the other extreme, if 100% take part, as happened in the AT&T offering of 1971, the $105 investment would buy exactly one share.

Time Warner officials described the plan to 200 securities analysts in a two-hour meeting that one Wall Streeter described as "acrimonious." Explains Morris Mark, whose asset-management company holds more than 200,000 shares of the company's stock: "While I'm sure there's a lot of good intent and bright imagination behind this plan, they've made an error. It is not the right way to raise capital. It will create a conflict between those with deep pockets and those without."

The plan calls on stockholders to invest fresh cash to prevent their current shares from being diluted by the issue of the new ones, which will represent a 60% increase in the current 57.8 million outstanding shares. If the shareholder is unwilling or unable to put in the additional money, he can sell the rights on the open market.

The deal irked some shareholders who held stock in Time Inc. when Paramount Communications made a failed bid for it in 1989. Time shares topped $182 then, but a year later fell as low as $66; before the rights plan was unveiled, they had climbed back to $120. "If you're a longtime Time Inc. shareholder, with this plan you've once again been moved to the back of the bus," complains Richard Reiss, managing partner of Cumberland Associates, an investment firm that holds Time Warner shares.

Analyst Jeffrey Logsdon, of Seidler Amdec Securities in Los Angeles, prefers to look at the bigger picture. "It will be beneficial to Time Warner to have less debt," he says. "It will reduce their interest costs and the perceptions about leverage. The long-term investor will have to be patient. The stock drop is a knee-jerk reaction to an unexpected event."

Time Warner executives are restricted from publicly discussing details of the deal until it is approved by the Securities and Exchange Commission. But Wall Streeters who heard the sales pitch said company officials contended that investors would get a good deal. In return for putting up cash, maintains Time Warner, stockholders would gain greater value for their stake in the company because its debt would be slashed by up to $3.5 billion. Even some analysts skeptical of the short-term payoff for investors acknowledged that the plan, if it goes ahead, would strengthen the company. "Overall, in the long term, this is positive," said Christopher Dixon of Paine Webber. "Time Warner is taking an active role in reducing its debt. Once the dust settles and emotions fall by the wayside, longer-term rational investors will recognize that Time Warner is positioned to generate high returns."

Until then Time Warner will have to brace for swings in the company's stock price as investors debate the merits of the rights offering, which is scheduled to begin June 17 if the SEC approves. But nobody ever said high finance was for the faint of heart.

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