AOL Gains Cable Assets in TWE Deal

AOL Time Warner is looking to deliver high-speed broadband services to 10 million homes as part of a restructured 10-year joint venture with AT&T regarding their Time Warner Entertainment cable/content assets.

The deal means AOL gets back full control of major entertainment properties within TWE such as the cable channel HBO and Warner Brothers Studio, assets that had been tied up in the complex ownership arrangement with AT&T.

But perhaps most important for AOL Time Warner, the deal helps it add more broadband subscribers at a time when its dial-up base of about 34 million is starting to slip.

Under the terms announced Wednesday, AOL would pay AT&T $2.1 billion in cash and $1.5 billion in stock in order to buyout AT&T’s 27.64 stake in Time Warner Entertainment (TWE).

The deal would create a new subsidiary for AOL Time Warner called Time Warner Cable, including its own cable assets and subscribers which it now counts at 10.8 million.

AT&T Broadband and Comcast (in the midst of a merger that would create the nation’s largest cable operator with about 22 million subscribers) also struck a three-year non-exclusive agreement with AOL. The deal would offer AOL High-Speed Broadband service to about 10 million subscribers within the merged AT&T Comcast cable systems. Within its Road Runner division, AOL Time Warner currently serves an estimated 2.5 million high speed customers.

The arrangement would enable AOL to expand its high-speed subscriber base (albeit for a price) as well as answer critics of its perceived lack of broadband strategy as its dial-up ISP business slows. The high-speed service is expected to be first marketed in Boston, Indianapolis, Seattle and Nashville.

The deal, valued at between $8.5 billion and $9 billion, helps untie all three media companies from complications besetting their own agendas.

AT&T’s broadband division, for one, would have one less ownership structure for regulators to ponder as well as more cash on hand as it looks for regulatory approval of its planned merger with Philadelphia-based Comcast (the terms of the TWE buyout are not contingent on the merger with Comcast closing).

In addition, AT&T Broadband would hold a 21 percent equity interest (with less than 5 percent voting power in the election of directors) in AOL Time Warner’s new cable subsidiary Time Warner Cable.

AOL, for its part, plans to pay AT&T for the nearly 28 percent chunk of TWE by floating an IPO of the Time Warner Cable division, perhaps during the first half of next year. During a conference call Wednesday to discuss the deal, AOL Time Warner officials stressed the careful, step-by-step process involved in each facet of the TWE arrangement.

But when each aspect of the deal is eventually sewn up, the world’s largest media company is expected to hold close to 80 percent of the new Time Warner Cable subsidiary. And, as AOL Time Warner CEO Richard Parsons put it, “all of the company’s state-of-the-art cable assets will be combined for the first time into a well-capitalized, pure-play cable company,” with a “significant nonaffiliated third-party broadband cable carriage for AOL High Speed Broadband.”

While all three companies are trumpeting victory in restructuring the complex ownership stake, the deal clearly gives AOL some good news to announce for a change. The announcement follows weeks of management shakeups in the media company, along with news of regulatory and federal investigations into AOL’s accounting practices and a steady slide in its stock price.

Parsons added: “Through this restructuring, we will simplify our overall structure, while maintaining the integrity of our balance sheet. The AOL High Speed Broadband carriage agreement provides us with a critical opportunity to partner with a key player in the cable industry.”

AOL’s Chairman Steve Case said the agreement “gives AOL a new opportunity to market its High Speed Broadband service to a broader audience, and it will give AT&T Comcast’s cable customers greater choice, convenience, and control over their Internet experience.”

AT&T’s CEO, C. Michael Armstrong, said the deal would enable the company to turn a non-strategic investment into cash that it can use to pay down debt.

In addition, Comcast President Brian L. Roberts said the ability to monetize AT&T’s stake in TWE assets, which will become a 21 percent stake in Time Warner Cable, helps strengthen AT&T Comcast’s balance sheet.

Updates AOL Time Warner’s current cable subscriber count in fifth graph

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