News

AT&T, AOL Bring In Banks on TWE

5/20/2001 8:00 PM Eastern

With the planned spinoff of its broadband unit looming on the horizon, AT&T Corp. has ended negotiations with AOL Time Warner Inc. concerning its 25.5 percent stake in Time Warner Entertainment LP.

Last week, both sides hired investment bankers to evaluate the partnership: AT&T signed on with CS First Boston Corp. and AOL Time Warner hired Bear Stearns & Co.

By retaining investment bankers, the two sides have set a process in motion that will either result in an AOL Time Warner buyout of AT&T's interest in TWE, or a public sale offering of AT&T's shares in the partnership.

In October, AT&T announced its plan to split into four separate units — broadband, business services, consumer services and wireless. An initial public offering for AT&T Broadband was expected this summer.

AT&T has been negotiating for months to sell its TWE stake — inherited through its acquisition of MediaOne Group Inc — to AOL Time Warner, but it had been unable to reach an agreement. Now, investment bankers will determine the value of the partnership, which includes Home Box Office Inc., the Warner Bros. film studio and interests in Time Warner Cable systems.

According to sources, both parties have about 20 days to select a third investment banker to determine how many shares could be sold in a public offering, the price at which any of that stock could be sold and the price at which AT&T's remaining shares could be sold.

After that, TWE must determine whether to proceed with the registration process. If it decides to go ahead, TWE would have to file a registration statement and the shares would be offered to the public. If it decides not to proceed, AT&T could force TWE to buy its interest at the value set by the investment banks.

"As we've repeatedly said, we're comfortable with the registration process," AOL Time Warner said in a prepared statement. "The decision to move forward with the registration process will have no impact on the way we manage the day-to-day operations of TWE."

In February, after several months of negotiations, AT&T requested that AOL Time Warner convert the limited partnership into a corporation and register its stake for sale in a public offering.

Back in February, AOL Time Warner had reportedly offered to pay between $9 billion and $10 billion for AT&T's interest in TWE, but insisted on greater access for its America Online Inc. Internet service on AT&T's cable systems in return.

AT&T Broadband expects to use the proceeds from the sale of its TWE stake to help pay down debt. According to a federal filing last week, that's a very hefty amount.

In a proxy statement filed May 11, AT&T said that about $28.4 billion of its $65 billion debt load would be allocated to AT&T Broadband. Its Business Services unit will have the next highest obligation, at $27.1 billion.

Although the filing did offer some insight on how AT&T will split up its debt, it failed to detail how the proceeds from asset sales and the planned IPO of the Broadband division would be distributed.

AT&T stock price has fallen dramatically over the past year, mainly because of declining profit margins and a debt load that swelled to $65 billion. AT&T has pared off about $17.5 billion in debt in the past year, mainly through asset sales.

When those debt reductions are taken into account, AT&T Broadband leverage drops to about $15.6 billion, said AT&T spokeswoman Eileen Connolly. At AT&T Business Services, the debt load has been reduced to about $19.7 billion, she said.

AT&T Broadband's debt level could fall even further with the proceeds from its planned sale of its stake in TWE and its 30 million shares of Cablevision Systems Corp. stock, valued at about $2 billion.

Douglas Christopher, an analyst who follows AT&T for Crowell, Weedon & Co., said allocating additional debt to the cable unit makes sense.

"That is the specific unit that is responsible for most of AT&T's debt and the increase in it over the last couple of years," Christopher said. "That's where it should be."

Christopher added the additional debt load shouldn't have much of an impact on AT&T Broadband's ability to raise money for upgrades or other business activities.

March