AOL-TW, AT&T Dissolving TWE Pact

AT&T AOL Time Warner CBS/AP

AOL Time Warner Inc. and AT&T Corp. said on Wednesday they plan to dissolve a decade-old entertainment and cable partnership in an estimated $8.5 billion to $9 billion deal that would help AT&T trim its debt pile and help AOL simplify its corporate structure.

Under the deal, AOL Time Warner Inc. plans to buy out AT&T Corp.'s stake in their cable television, moviemaking and programming partnership, and said it may sell a stake in its cable TV operations in an initial public offering as early as next year.

The deal announced Wednesday includes most of AOL Time Warner's cable TV systems and its Warner Bros. film studio, its Home Box Office pay-TV service and other programming businesses.

The two sides have been in discussions for some time on unwinding the partnership known as TWE. AOL Time Warner owns about 72.4 percent of the partnership, and AT&T owns the rest.

The deal gives AT&T cash and readily saleable assets, while AOL Time Warner avoids having to buy its partner out for cash at a time when it is struggling under a heavy debt.

SoundView Technology analyst Jordan Rohan said that after the deal, AOL Time Warner would own more entertainment assets and less cable. "In my book, that's a positive due to the higher potential for content assets to generate free cash flow," he said.

Under the terms of the deal, AT&T gets $2.1 billion in cash and AOL Time Warner stock valued at $1.5 billion, as well as a 21 percent stake in the Time Warner Cable Inc. business in exchange for its stake in TWE.

While AOL Time Warner didn't affix a value to the cable stake, The Wall Street Journal said it would boost the total value that AT&T is getting in the deal to between $8.5 billion to $9 billion.

For its part, AOL Time Warner gets full ownership of Warner Bros. and HBO and stakes in the TV channels Comedy Central, Court TV and The WB Network.

In addition, AT&T and Comcast have agreed to make America Online's high-speed version of its Internet service available on Comcast's cable systems. That type of arrangement could give AOL access to more customers.

The stake in the cable business should benefit Comcast Corp., which is buying AT&T's cable TV businesses and would inherit AT&T's stake in TWE. The former Time Warner created the TWE partnership in 1992.

The cash, AOL stock and Time Warner Cable shares will go to Comcast if that company completes its AT&T cable operation before year's end, which is expected.

AT&T and Comcast will get an immediate influx of cash and will be able to sell its stakes in both AOL Time Warner and the new cable business in the future to generate more money.

AOL Time Warner chief executive Dick Parsons said the deal was "the best possible outcome for our investors" and will simplify its overall structure.

"AOL Time Warner will recapture total ownership and control of its content businesses, enabling us to manage this portfolio of assets for maximum value. And all of the company's state-of-the-art cable assets will be combined for the first time into a well-capitalized, pure-play cable company," he said.

AOL plans to conduct an initial public offering of part of its stake in the Time Warner cable business soon after the restructuring in completed in early 2003.

That would enable it to pay down the debt incurred in making the $2.1 billion cash payment to AT&T, AOL said.

"The fact is that AOL or Time Warner has had managerial control of all of the assets within TWE since 1999," said Katherine Styponias, an analyst at Prudential Securities. "So it's not as if being completely owned by AOL is going to mean things are going to change radically. Nevertheless, it's one less thing to worry about when trying to put a value on the company."

The complex agreement ends years of negotiations, which languished amid disagreements over price, the venture's complex mix of businesses, and the two partners' own financial constraints.

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  • Jaime Holguin

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