Time Warner Entertainment Company, L.P.: Comments on Restructuring

AOL Time Warner Inc. (“AOL”) and AT&T Broadband (“AT&T”)/Comcast Corporation (“Comcast”), the two largest cable operators in the U.S., have reached an agreement in restructuring the Time Warner Entertainment Company, L.P. (“Time Warner Entertainment”) partnership.  The ownership structure of Time Warner Entertainment consists of AT&T’s 27.64% equity interest and AOL’s 72.36% interest.  The assets held in this partnership include: approximately 10.8 million cable subscribers; and interest in content, including HBO, Warner Brothers, Comedy Central, and the WB network. 

The mechanics of the restructuring are as follows:

AT&T will receive $2.1 billion in cash funded from the new cable company;

AT&T will receive $1.5 billion in AOL shares; and

AT&T will hold a 21% equity interest in a new cable company that will be named Time Warner Cable Inc. once regulatory approval is completed. Completion is expected in the first half of 2003.

 

Upon regulatory approval, AOL will assume a 100% equity interest in Time Warner Entertainment, which will consists primarily of its content assets.  Time Warner Cable Inc. will become a pure play cable operator and consist of the 10.8 million wholly owned cable subscribers within the AOL group.  Upon receiving regulatory approval, Time Warner Cable Inc. will be IPO’d, at which time AT&T will have the opportunity to exit from its equity investment in AOL and its 21% ownership interest in Time Warner Cable Inc.  The final component to this agreement is a three-year, non-exclusive agreement, which will give AOL access to market its high-speed Internet services to AT&T and Comcast customers.

 

Overall, the impact is positive for both AOL and AT&T, since it (1) facilitates the AT&/Comcast transaction and (2) resolves some of the uncertainty that has hung over AOL in the capital markets.  For AT&T and Comcast, the cash payment will help to reduce debt of the newly merged group within the next 12 months.  For AOL, the restructuring simplifies its corporate structure and creates Time Warner Cable Inc., a pure play and profitable cable operator.  Despite the initial increase in AOL’s leverage, the resolution of the Time Warner Entertainment partnership and the creation of Time Warner Cable Inc. will allow a public offering of the new cable company’s shares.  The proceeds can be used to return AOL’s debt to previous levels.  Once Time Warner Cable Inc. becomes a public company, it could play an active role in helping to further consolidate the U.S. cable industry.