Analysts Question Time Warner-AT&T

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A Time Warner Cable-AT&T Broadband merger would open a regulatory can of
worms and might not make business sense, analysts said Wednesday after digesting
a report that such a move may be in the works.

The Wall Street Journal said AOL Time Warner Inc. and AT&T Corp.
officials were in preliminary talks about merging a spun-off Time Warner Cable
with AT&T's cable operations.

AT&T recently rejected Comcast Corp.'s unsolicited bid for AT&T
Broadband, and AT&T has said that it will explore a range of other options
regarding the cable assets.

AOL Time Warner officials declined comment.

As reported, a structure under discussion would give AT&T shareholders 50
percent of the cable operations and AOL shareholders 45 percent.

With about 26.2 million subscribers, the combined No. 1 and No. 2 MSOs would
have just under 30 percent of the domestic multichannel-video market -- just
below the federal limit before that cap was suspended.

But there are complications other than sheer size of cable subscribers. The
new largest MSO would have ties to online giant America Online Inc. and to the
extensive Time Warner programming holdings, in addition to a large number of
cable subscribers. AOL and Time Warner faced much regulatory scrutiny before
their merger closed.

The consensus of analysts on financial-news cable networks Wednesday was that
an AOL-AT&T cable merger wouldn't happen, mostly because of regulatory
issues.

Another analyst said the combination might not work for business reasons.

'It doesn't make any sense to me,' Sanford Bernstein & Co. analyst Tom
Wolzien said. 'If they [AOL] actually acquire and run it, you take the lid back
off the regulatory Pandora's box that just got nailed down. If they spin it out,
it takes its cash flow with it. And in this advertising environment, the last
thing AOL needs to do is make itself more reliant percentagewise on
advertising.'

Wolzien added that it would make more sense for AOL Time Warner to help
Comcast sweeten its bid. Such a linkup would help cable-network-owning AOL Time
Warner to negotiate programming relationships.

'You could wind up launching to not only AOL and AT&T Broadband, but you
also add Comcast's 8.5 million [subscribers] on top of that,' he said. 'On day
one, you could have a new network that could act as a competitor to MTV [MTV:
Music Television] with access to 33 million subs.'

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