AOL May Buy AT&T;’s Share of Entertainment Unit

AOL Time Warner Inc. is poised to simplify one of its most complex business units by buying out AT&T; Corp.’s stake in Time Warner Entertainment for $9 billion in cash, AOL stock and shares in a new publicly traded cable business, people familiar with the situation said.

The deal, expected as early as today, would give AOL Time Warner full ownership of Warner Bros. studios and cable networks HBO, Court TV and Comedy Central, and could help bolster AOL stock by showing investors that the company is serious about cleaning house.

The two sides were still haggling over the key issue of AOL gaining access to AT&T;’s cable networks, and an announcement on that aspect of the deal might not come for several more days, people familiar with the negotiations said. AT&T; is selling its cable business to Comcast Corp., and it is unclear whether the access deal would include Comcast’s networks. Neither AT&T; nor AOL and Comcast would comment.

Although AOL Time Warner’s payments for TWE would dampen its 2003 earnings by a few cents a share and possibly threaten its credit rating, the media company would benefit by eliminating the headache of TWE, analysts said.

“A TWE restructuring should remove a strategic overhang and a cloud of uncertainty around AOL Time Warner’s stock. In addition, a deal probably would simplify the capital structure,” JP Morgan analyst Jason Bazinet said in a research report.

Securing access to AT&T;’s networks is important because it would give AOL a much-needed pipeline for high-speed Internet access and its cable channels and would help convince cable operators it is not an adversary.

The complex TWE agreement would end more than two years of negotiations, which languished amid disagreements over price, the venture’s complex mix of businesses, and the two partners’ own financial constraints.

Under terms of the deal, AT&T; would receive about $2 billion in cash and about $1.5 billion in AOL common stock in exchange for its 27.6% stake in TWE, which includes the Warner Bros. film studio, most of Time Warner Cable, as well as the three cable TV networks. AT&T; also would get a stake of more than 20% in a new cable TV business that would have about 9 million subscribers, which AOL Time Warner would sell to the public, depending on market conditions, people familiar with the deal said. The 20% stake would be valued at about $5.5 billion.

The deal will help AT&T; cut its debt load and strengthen its balance sheet as it prepares to sell its cable TV business, AT&T; Broadband, to Comcast.

JP Morgan’s Bazinet estimated that the sale of AT&T;’s stake in TWE would generate about $5.8 billion to $6.5 billion in after-tax proceeds and help the combined AT&T-Comcast; maintain investment-grade debt ratings.

To fund the TWE purchase, Bazinet said, AOL would issue about 136 million shares of common stock and use about $2 billion from its existing credit facilities.

Shares of AOL rose 77 cents to $13.33 in NYSE trading. AT&T; shares closed at $10.76, up 31 cents, also on the NYSE.