AT&T-AOL Deal Is Expected Soon on Unwinding of Cable Partnership
By Martin Peers, Staff Reporter of The Wall Street Journal
NEW YORK -- AOL Time Warner Inc. (August 20) and AT&T Corp. are expected to announce as early as Tuesday a deal under which AOL will buy AT&T out of a content and cable partnership between the two companies, ending years of talks. ADVERTISEMENT
The deal will give AOL full ownership of the Warner Bros. film studio and Home Box Office and will likely also result eventually in a public offering of a minority stake in its giant cable systems, making it easier for AOL to pursue acquisitions in the cable-TV sector. At the moment, Warner Bros., HBO and most of Time Warner Cable are held in the Time Warner Entertainment partnership, controlled by AOL but about 27%-owned by AT&T.
Under the deal, AT&T is expected to get a stake of between 20% and 22% in a newly created Time Warner Cable company, as well as about $2.1 billion in cash and $1.5 billion in AOL stock. The proceeds will eventually end up with Comcast Corp. (NasdaqNM:CMCSA - News; CMCSA, CMCSK), which inherits AT&T's stake in the TWE partnership as a result of its acquisition of AT&T's cable systems later this year.
As part of the deal, Comcast is expected to agree to allow America Online to sell a high-speed version of its Internet service on Comcast's cable systems, a big win for AOL. This would be the first cable system to carry the AOL service aside from Time Warner Cable.
Comcast is expected to sell the stake in the new Time Warner Cable company in a public offering when market conditions improve. It will also eventually sell the AOL shares.
The former Time Warner created the TWE partnership in 1992 to help reduce debt but it has spent most of the past eight years trying to unravel the partnership, which investors complained made the company's balance sheet hard to analyze. AOL's new chief executive, Richard Parsons, had made simplifying the company's structure a priority.
Still, investors are concerned about the cost of a TWE restructuring, particularly at the prospect that AOL will have to pay out cash when the company's financial flexibility is limited by its heavy debt load.
