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AOL Takes Control of Time Warner Content Companies

21 Aug, 2002 By: Hive News

AOL Time Warner Inc. will restructure Time Warner Entertainment Company (TWE), taking control of Time Warner's content companies and preparing for an initial public offering of its cable operations, the media giant announced today.

AOL Time Warner will assume complete ownership of TWE's content assets, including Warner Bros. and Home Box Office (HBO), as well as TWE's interests in The WB Network, Comedy Central and Court TV. All of AOL Time Warner's cable assets, including those owned by TWE, will be owned by a new subsidiary of AOL Time Warner to be called "Time Warner Cable Inc."

The company also announced a broad carriage agreement that will make AOL high speed broadband service available on a number of AT&T Comcast cable systems.

"By gaining full ownership and control of Warner Bros. and HBO, as well as TWE's interest in The WB Network, Comedy Central and Court TV, we will have the flexibility to operate these businesses in a more integrated, efficient way," said AOL Time Warner CEO Dick Parsons. "With a pure-play cable currency and what will be the strongest balance sheet in the cable industry, Time Warner Cable Inc. will be well positioned to maximize the value of our existing cable footprint and pursue future strategic opportunities."

As part of the restructuring, AT&T (or AT&T Comcast, depending on when the transaction and merger close) will exchange its stake in TWE, which at June 30 consisted of a $5.7 billion preferred interest and a 27.64 percent residual equity interest, for $2.1 billion in cash, AOL Time Warner common stock valued at $1.5 billion at the time of closing, and a 21 percent economic stake in the business of Time Warner Cable Inc.

Upon completion of the restructuring, which is expected to occur upon receipt of local cable franchise approvals, where required, and other required regulatory approvals in early 2003, AOL Time Warner effectively will own a 79 percent economic stake in the business of Time Warner Cable Inc. AOL Time Warner will have a controlling voting interest in the new subsidiary and will consolidate Time Warner Cable Inc.'s financial results for accounting purposes. At closing, Time Warner Cable Inc. is expected to have approximately $8.1 billion in consolidated net debt and preferred equity.

Subject to market conditions, AOL Time Warner plans to conduct an initial public offering of Time Warner Cable Inc. soon after the restructuring. It is anticipated that the first $2.1 billion raised in any such IPO would go to pay down Time Warner Cable Inc.'s debt incurred to fund the $2.1 billion cash payment to AT&T. Thereafter, AT&T will have certain priority registration rights with respect to its stake in Time Warner Cable Inc.

Time Warner Cable Inc.'s cable television operations will include cable systems serving approximately 10.8 million subscribers, with 93 percent of its customers in systems of 100,000 subscribers or more.

"This restructuring of TWE is the best possible outcome for our investors and marks another important step in achieving our company's near-term priorities," said Parsons. "Through this restructuring, we will simplify our overall structure, while maintaining the integrity of our balance sheet. AOL Time Warner will recapture total ownership and control of its content businesses, enabling us to manage this portfolio of assets for maximum value. And 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. Finally, the broadband access agreement provides us with our first significant nonaffiliated third-party broadband cable carriage for AOL High Speed Broadband."

The restructuring agreement was approved by the boards of directors of AOL Time Warner, AT&T and Comcast.

AT&T Broadband and Comcast, which have announced plans to merge to form AT&T Comcast, will make AOL high speed broadband available on AT&T Comcast systems passing about 10 million homes within two years after closing. Key markets covered under the agreement include Boston, Seattle, Indianapolis and Nashville. The parties also agreed to roll out AOL high speed broadband on AT&T Comcast systems passing an additional 9 million homes in the future, subject to the parties' mutual satisfaction with the arrangements.

Financial terms of the three-year AOL High Speed Broadband carriage arrangement were not made public.

"The AOL High Speed Broadband carriage agreement provides us with a critical opportunity to partner with a key player in the cable industry. Our task is to develop broadband products and services that become embedded in consumers' lives, just as AOL has done in the narrowband world and HBO has done in cable television," Parsons said. "We are confident that AOL members and other cable customers will increasingly take advantage of this upgrade to AOL High Speed Broadband access on AT&T Comcast systems, as they have on Time Warner Cable systems."

AOL Time Warner Chairman Steve Case said: "The agreement announced today is an important step forward in achieving our company's strategic goals of simplifying our structure and expanding the reach of our AOL High Speed Broadband service. It 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."

Bear Stearns acted as lead financial advisor to AOL Time Warner. Lehman Brothers also served as a financial advisor to AOL Time Warner. Paul, Weiss, Rifkind, Wharton & Garrison acted as AOL Time Warner's legal advisor.

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