AT&T Said in Cable Talks with AOL Time Warner

On the heels of AT&T’s announcement that its broadband division would improve its margins within three years, a published report said AOL Time Warner is in friendly talks with AT&T Corp. about a possible merger of the two companies’ cable operations.

Citing people familiar with the matter, The Wall Street Journal said the talks between the number one and number two cable companies were conceptual and very fluid. However, it said the scenario on the table is that AT&T would spin off its broadband division and simultaneously merge it with AOL’s cable business, Time Warner Cable, in a tax-free transaction.

If such a deal were to happen, it would involve intensive regulatory and anti-trust scrutiny, especially after AOL just passed regulatory muster in January on its merger agreement with Time Warner.

But the report said the possible merger would be structured such that transactions by the new cable company would be conducted at arm’s-length and would be not entirely beholden to AOL Time Warner.

Plus, it said executives may be able to sell to regulators the idea that a merger of the cable operations could bring broadband connections to consumers more quickly, and would therefore be good for them.

A spokesperson in the anti-trust division at the Department of Justice said since the story is largely speculative, there is nothing to comment on. Unless AOL Time Warner and AT&T come to federal attorneys with a cable operations merger agreement to review, there’s really nothing to say, the spokesperson added. Ditto from a spokesperson from the Federal Communications Commission, which would have to review any planned transfer of broadcasting licenses by the two companies.

The Journal story also comes on the heels of an extensive conference call that AT&T executives held Tuesday about the cable division’s current and future performance targets and one day after it released second quarter earning that showed an overall net loss of $191 million, compared to a profit of $1.8 billion during the same quarter a year ago.

The conference call was largely viewed as AT&T’s response to the $58 billion stock and debt bid for AT&T Broadband put forth by Comcast Corp. , which the AT&T board rejected last week as inadequate.

During the conference call, AT&T’s CEO and chairman, C. Michael Armstrong, said profit margins for AT&T Broadband are expected to hit between 38 percent and 40 percent by the end of 2003 and that the division is on target with its financial objectives for this year.

“We have grown our services, (and) deepened penetration in digital and data and telephony through first half of this year,” he said. “We want investors to see that AT&T Broadband is not just the nation’s largest cable TV company but the leading provider of integrated residential broadband services.”

AT&T Broadband’s revenues were $2.6 billion during the second quarter, up 49.5 percent over the same time last year and helped by an estimated growth of just over a half-million telephony, high speed data and digital video customers.

As of the end of June, AT&T Broadband had 848,000 broadband telephony customers, 1.3 million high-speed data customers and 3.1 million digital video customers, which brings the total of advanced service subscribers in the cable division to 5.3 million out of just under 14 million subscribers overall, the company said.

The Journal report, meanwhile, has all the markings of a trial balloon that AT&T (and AOL for that matter) could be floating to gauge reaction from federal regulators while it looks for a better price on a possible sale of the broadband division, which effectively went into play for a possible sale when AT&T announced it would restructure into four separate companies. (The wireless division has since spun-out and AT&T said it would delay the planned spin-off of the broadband division while it explores other alternatives — code for its search for a better price by a suitor.)

Shares of AT&T were up about 12 cents to $19.58 in late morning trading on the New York Stock Exchange, while shares of AOL Time Warner had slipped to $42.48 in mid-morning trading Wednesday.

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