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AOL, AT&T; Alter Cable TV Alliance

TIMES STAFF WRITER

AOL Time Warner Inc. and AT&T; Corp. agreed to dissolve their complex Time Warner Entertainment partnership in a $9-billion deal that also will create a publicly traded cable TV company.

AOL Time Warner will pay $3.6 billion in cash and stock to AT&T; and get 100% ownership of HBO and Warner Bros. film studios, plus a controlling stake in the new cable company, to be called Time Warner Cable Inc.

Time Warner Cable, the nation’s second-biggest cable operator with 10.8 million subscribers, plans to go public with an initial stock offering, perhaps as early as next year.

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The deal, expected to close in early 2003, simplifies AOL Time Warner’s bewildering financial structure, positions it to buy more cable TV properties while prices are down and gives its troubled America Online unit a long-sought means of offering high-speed Internet connections to millions more customers on AT&T;’s cable TV network.

AT&T; will get $2.1 billion in cash, $1.5 billion worth of AOL Time Warner stock and a 21% stake in Time Warner Cable, all of which will be inherited by Comcast Corp. when its purchase of AT&T;’s cable business closes this year.

The deal provides Comcast with quick cash to help pay down the heavy debt it will incur in the purchase of AT&T;’s cable operation, a key concern for investors.

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AT&T; Comcast is expected to sell its stake in Time Warner Cable after the public offering. With more than 20 million customers, AT&T; Comcast by far will be the nation’s largest cable-TV operator and probably would attract antitrust scrutiny if it held onto the Time Warner Cable shares.

Because of Comcast’s interest, its president, Brian L. Roberts, was involved in the negotiations, along with AOL Time Warner Chief Executive Richard D. Parsons and AT&T; Chairman C. Michael Armstrong.

Parsons said in a conference call Wednesday that the agreement makes AOL Time Warner a “far more transparent, easy-to-understand company,” while protecting its balance sheet from excessive debt.

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Credit-rating firm Standard & Poor’s on Wednesday placed AOL Time Warner’s bonds under review for a possible downgrade, but Standard & Poor’s analyst Heather M. Goodchild said the AT&T; agreement actually was more favorable to AOL Time Warner than she expected.

There was speculation in recent weeks that AT&T; and Comcast would hold out for much more cash, which likely would have pushed AOL Time Warner’s credit rating into the “junk-bond” range. As it is, the $2.1-billion cash component will have to be borrowed, but Parsons said it would be repaid immediately when the new cable company goes public.

Investors were cheered by the long-awaited agreement.

AOL Time Warner rose 97 cents Wednesday to $14.33 on the New York Stock Exchange, its sixth straight daily gain. The stock, however, is down 55% year to date. AT&T; shares gained $1 to $12.18 on the NYSE.

Time Warner Cable will debut as a relatively low-debt player in a heavily leveraged cable industry, which should give it lots of clout as a potential buyer, said analyst Jessica Reif Cohen of Merrill Lynch.

Cable TV stocks, downtrodden all year, jumped Wednesday. Comcast leaped $3.32 to $25.08 on the Nasdaq Stock Market; Cox Communications Inc. gained $2.26 to $25.65 on the NYSE, and Cablevision Systems Corp. rose $1.83 to $9.65 on the NYSE.

For AOL Time Warner, the most important part of the deal may be a three-year carriage agreement granting America Online access to AT&T;’s cable system, which has the nation’s biggest network of high-speed Internet customers.

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Until now, high-speed Internet service has been available to AOL customers only through AOL Time Warner’s own cable TV properties.

Within four months of the deal’s closing, AOL will get access to up to 5 million customers of AT&T; Comcast--as the post-merger company will be known--in the Boston, Seattle, Indianapolis and Nashville areas. In the second year, AOL will be offered to another 5 million AT&T; Comcast homes.

In the third year, at the option of both parties, AOL would get access to another 9 million homes.

Parsons, citing competitive concerns, declined to provide the terms of the carriage deal, but the Wall Street Journal said AOL would pay AT&T; Comcast a stiff monthly fee of $35 to $40 per customer. AOL would charge its customers $54.95 a month for the service, Parsons said.

A high access fee would, of course, limit the profitability of broadband service, but analysts said it was even more crucial for AOL to make progress on rolling out the high-speed service. Subscriber growth for AOL’s current dial-up Internet service has slowed sharply in the last year.

The deal with AT&T; Comcast should lead to other AOL Internet service deals with other cable companies, Parsons said, adding that “the industry has always followed a strong leader.”

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“It followed John Malone when he was the fat kid in the boat, and now it’s Brian Roberts.”

Malone, a cable pioneer, is chairman of Liberty Media Corp.

Time Warner created Time Warner Entertainment in 1992 in partnership with two Japanese companies, and AT&T; acquired its 27% stake two years ago through its acquisition of the cable TV firm Mediaone Group.

Both AOL Time Warner and AT&T; had long hoped to end the awkward arrangement, but negotiations never reached fruition under former AOL Time Warner Chief Executive Gerald M. Levin.

“It probably needed a change of personalities to get things moving,” said Morris Mark, president of Mark Asset Management in New York, which held about 1.5 million AOL Time Warner shares and 1 million Comcast shares as of June 30.

Mark praised Parsons for following through on one goal he set when he took over the helm at AOL Time Warner in May. “In a tough environment, he is delivering on what he said he’d do,” Mark said.

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