AOL, Disney in Talks to Merge News Operations

Top executives at AOL Time Warner Inc. and Walt Disney Co. have been negotiating a plan to spin off their CNN and ABC News divisions into a stand-alone news powerhouse, but the talks got a lukewarm reception last week at an AOL Time Warner board meeting, according to people familiar with the situation.

The proposal would leave ABC News, which carries high salaries for its celebrated news anchors, as a minority financial partner in the new venture, sources said.

Although talks have been sporadic for 18 months between the two companies, they have gained momentum in recent weeks, according to sources.

This is the closest that CNN, owned by AOL Time Warner, has come in its two-year quest to forge an alliance with a rival broadcaster’s news division as a way to cut costs.

Recently, CNN has seen its dominance of 24-hour news challenged by Fox News Channel and MSNBC, and despite a strong worldwide presence, it has few on-air personalities who equal the star power of Peter Jennings, Barbara Walters or Diane Sawyer of ABC News, which is owned by Disney.

Both companies acknowledged ongoing discussions about a news venture.

“We’ve had conversations for the last 18 months and no deal has been reached,” said Disney spokesperson Zenia Mucha.

AOL Time Warner spokesman Brad Turell echoed those words, saying, “We have had conversations with two networks and no deals have been reached.”

Past talks between CNN and ABC, as well as between CNN and CBS News, have broken down over issues of control, with all sides privately disparaging their rival’s operations. AOL Time Warner and Disney have recently come under intense pressure to boost lagging financial results, analysts say, and that may be overriding other concerns in this round of talks.

AOL Time Warner divisions are under pressure to help make up for a severe downturn in ad revenue at the company’s America Online group, while ABC network’s plummeting prime-time ratings will result in an estimated network loss of $500 million this year.

Moreover, Disney has had a difficult relationship with its news division. Earlier this year Disney executives, without informing ABC News executives, were prepared to cancel the prestigious late-night news program “Nightline” to bring talk-show host David Letterman to ABC. But Letterman stayed at CBS.

ABC News President David Westin is said to be aware of the current talks with CNN.

Under the plan that AOL and Disney have discussed, the two news divisions would be pooled into a new company with revenue of more than $1.6 billion, about $500 million to $600 million accounted for by ABC News and more than $1 billion from CNN.

The plan calls for AOL Time Warner to own from two-thirds to three-quarters of the new company, and Disney the remaining stake. But operational control of the joint news venture might be more evenly split, mitigating some objections from ABC, sources said.

CNN earns more than $200 million before taxes annually, while ABC News this fiscal year will eke out an estimated pretax profit of $10 million to $15 million, said people familiar with the numbers. Combined, the new operation would shave $100 million in expenses annually, and perhaps as much as $300 million, according to calculations.

AOL Time Warner proposed a similar offer this summer to CBS, which is owned by Viacom Inc. But the broadcaster quickly passed on the CNN-CBS proposal, because CBS was uncomfortable giving up control of its news division, said company sources.

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Jensen reported in New York, Hofmeister in Los Angeles.