Time Warner Inc. (NYSE: TWX) finally announced that it will separate its majority-owned cable division after months of speculation. The media giant offered few details of how it would structure the transaction, but said that a complete separation of the 84% stake is in the best interest of both companies' shareholders. The announcement also comes at a time when Time Warner is struggling to revive its AOL unit and lift the margins on its film and television businesses.

Investors should watch this situation carefully as it could mean opportunity for profit. A transaction structured as a spin off could mean huge value creation for shareholders of Time Warner Cable (NYSE: TWC), but only after a few months. The theory is that most TWX shareholders that receive TWC stock in a spin off situation will sell it, which will put substantial downside pressure on TWC despite no change in fundamentals.

The selling pressure would drop the share price and reduce Time Warner Cable's earnings multiple. This undervaluation could persist for some time, but will likely be corrected when the next earnings announcement is made and analysts recalculate where the shares should be at historic multiples. These analysts will then likely upgrade the stock and recommend that investors pick up more shares to take advantage of the undervaluation.

Many investors are also closely watching the parent Time Warner in the event of a sale of its stake. This would generate substantial proceeds for the parent company that it could use to fund a share buyback program or boost dividends to unlock value. Share buybacks reduce the number of outstanding shares and therefore increase the earnings per share number and eventually the earnings multiple. Meanwhile, boosting dividends also typically leads to a higher valuation due to common investment models put in place to value companies.

In the end, there are many different routes that Time Warner could take to get rid of its stake and all of them are worth watching. Instances like these often provide investors with the ability to profit handsomely!

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