Settlements Put Media Giant in Red

Time Warner Inc. moved Wednesday to cap the gusher of red ink spilling from its ill-fated 2001 acquisition by America Online Inc., setting aside $3 billion for legal actions, including shareholder lawsuits alleging that investors were duped by inflated AOL revenue.

The move wiped out Time Warner’s second-quarter profit, leaving the New York-based media giant with a loss of $321 million, or 7 cents a share. It was the company’s first quarterly deficit in nearly three years.

Time Warner, which did not admit wrongdoing, will earmark $2.4 billion to settle with the lead plaintiffs in the shareholder actions and an additional $600 million to resolve other legal actions. The company previously had agreed to pay $510 million to settle federal probes into the matter.

Also, accounting firm Ernst & Young agreed to pay $100 million.

“By acting now to put these matters behind us, we avoid the costs and distractions of protracted litigation, an outcome we clearly believe serves the best interest of our shareholders,” Chief Executive Richard Parsons said in a conference call with analysts.

The shareholder settlements would tie up the major loose ends for the world’s largest media company and clean up a once-heralded deal that became a financial black hole. Some $200 billion in shareholder value was wiped out when the company’s shares plunged after the combination failed to yield promised results and the dot-com bubble burst.

Time Warner even took AOL off its corporate name, reflecting the Internet operation’s tarnished reputation. The company is gambling that it can morph AOL from a subscription service into a portal similar to Yahoo and Google.

“Everything turns on whether AOL.com can become a viable portal,” said Richard Greenfield, an analyst at Fulcrum Global Partners. “Given Time Warner’s content and AOL’s brand, it’s something they can do.”

Overshadowed Wednesday was Time Warner’s plan to repurchase up to $5 billion of its stock in the next two years, a move heralded by analysts and shareholders, who hope it will boost the company’s lagging share price.

Time Warner shares, which traded above $55 in 2001, lost 15 cents Wednesday, closing at $17.27.

Excluding the legal settlements and other one-time items, the company posted a profit of 18 cents a share, compared with 17 cents a year earlier. The number fell short of the 19 cents that analysts had expected, according to a survey by Thomson Financial.

Revenue for the three months ended June 30 fell 1%, to $10.7 billion.

Operating income for the company’s filmed entertainment unit, which includes Warner Bros. Entertainment and New Line Cinema, dropped 47% to $219 million as revenue slid 15% to $2.64 billion. The company said the numbers a year earlier were exceptionally strong because of the “Lord of the Rings” series.

Jeff Bewkes, chairman of the entertainment and networks group, said in the conference call that despite industrywide concern over the box-office softness, he expected the company’s domestic box office for 2005 to at least match last year’s total. Bewkes cited as reasons such films as “Charlie and the Chocolate Factory” and the upcoming “Harry Potter” release from Warner Bros., “March of the Penguins” from Warner Independent Pictures and New Line’s “The Wedding Crashers.”

Time Warner’s cable division was a standout, adding digital video and high-speed Internet subscribers. Operating income rose 10%, to $900 million, with revenue up 11%, to $2.36 billion.

AOL’s total revenue fell 4%, to $2.1 billion. Operating income jumped 10.6%, to $550 million. A 45% increase in advertising revenue was offset by the loss of nearly 1 million subscribers.

“AOL is a different business today,” said Gabelli & Co. analyst Christopher Marangi. “I don’t think they’ll put the name back on the company anytime soon.”

Operating income at the networks unit, including HBO, CNN and TBS, was off 4%, to $635 million, because of high programming costs. Revenue climbed 4.6%, to $2.49 billion.

Soft advertising hurt publishing profit, which includes Time and Sports Illustrated magazines. Operating profit dropped 2.5%, to $348 million, on a 4% increase in revenue, to $1.5 billion.

Separately, Advertising.com Inc., a unit of AOL, agreed to settle Federal Trade Commission charges that the company offered free security software called SpyBlast without telling users that it contained adware. Advertising.com will be required to clearly make that disclosure.