News late last week that 15 senior AOL Time Warner executives and directors made almost $500 million selling company shares at a high during 2001-all the while insisting the company could meet ambitious financial targets it would later miss-overshadowed earlier news of a long-awaited resolution to its troubled Time Warner Entertainment partnership.
The share sales between February and June 2001 by top executives-including Chairman Steve Case and CEO Richard Parsons-are now part of the Securities and Exchange Commission’s widening probe into the company’s questionable accounting practices and also the subject of a class-action shareholder suit. AOL Time Warner is declining comment on the probe.
The development quickly dampened what turned out to be a mixed victory for Mr. Parsons in announcing on Aug. 21 the restructuring of the Time Warner Entertainment partnership with 27.6 percent stakeholder AT&T Broadband and its new owner Comcast Corp. The tax-free deal valued at $8.6 billion should close within six months.
What the deal entails
The deal gives AOL Time Warner full ownership of TWE, which includes most of AOL Time Warner’s cable systems, Warner Bros., HBO, The WB, a 50 percent stake in Court TV and Comedy Central and other properties. In return, AOL Time Warner will spin off its cable systems into a pure cable subsidiary in which Comcast will hold a 21 percent stake. AT&T will also receive about $2.1 billion in cash and about $1.5 billion in AOL Time Warner stock.
AOL Time Warner also gains the right to offer its AOL high-speed broadband service to about one-third of previously inaccessible households served by AT&T and Comcast cable systems.
In an interview, Mr. Parsons made clear his intention to use the stock of the new publicly traded cable subsidiary as currency to acquire additional systems, which analysts say would likely include Cablevision Systems’ choice East Coast properties, Paul Allen’s Charter Communications and some systems owned by bankrupt Adelphia Communications.
Mr. Parsons said AOL Time Warner has 90 days after the deal closes in which to launch the Time Warner Inc. Initial Public Offering, otherwise Comcast will have the right to launch the offering.
Continuing volatile stock market conditions could throw off the plans, and that is why Comcast officials insisted on $2.1 billion in cash and $1.5 billion in AOL Time Warner stock they can immediately sell, to reduce nearly $4 billion of their own merger debt.
As a result of that outlay, AOL Time Warner must increase its debt from nearly $28 billion to $30 billion, about $8 billion of which will be assigned to the new cable spinoff. Proceeds from the spinoff will be used to pay the $2.1 billion in newly incurred debt, although Moody’s Investors Service and Standard & Poor’s are, respectively, maintaining a negative outlook and reviewing the situation for a downgrade over concern about the IPO timing.
Comcast has said it plans to sell off its 21 percent stake in the new cable entity, in which AOL Time Warner holds the remaining 79 percent and a controlling voting interest. AOL Time Warner, which has revised its earnings projections in recent quarters, says there will be only a slightly adverse impact on earnings per share.
“I don’t think you’re going to see a whole lot of big-time transactions coming. We spent 10 years putting this thing together and now my main focus is making it work the way it potentially could,” Mr. Parsons said.
Mr. Parsons said the company would be able to generate new revenues and value by once again wholly owning TWE assets such as HBO, Warner Bros. and The WB-although analysts expect the company to sell its interest in Court TV and Comedy Central.
While AOL Time Warner was not able to secure a more long-term Internet service provider pact for America Online with what will be the largest cable operator, it will get to roll out its broadband service to 5 million of AT&T-Comcast’s choicest subscribers within the first four months following the TWE close, and another 5 million subscribers in the year after that.
If both companies are pleased with the results, AOL gets a go at another 9 million AT&T-Comcast subscribers-a much slower and less sure rollout over three years than was ever expected. AOL also will pay an industry-high $40 per subscriber for access, share advertising and other revenues, relinquish customer billing to Comcast, and likely make no substantive profit initially from the arrangement, which will pave the way to negotiating carriage with other non-affiliated cable operators. Still, AOL Time Warner stock shot up nearly 8 percent last Thursday to $14 a share on the news, although it remained down 55 percent year-to-date.