AT&T, AOL Finally Unravel TWE

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After years of sometimes heated negotiations, AOL Time Warner Inc. has
struck a deal to unwind Time Warner Entertainment L.P., by paying cash and stock
worth about $8.5 billion to AT&T Corp. but getting back, in a side deal,
cable carriage for AOL's high-speed Internet service.

Under terms announced Wednesday, AT&T will get about $2.1 billion in
cash, $1.5 billion of AOL Time Warner stock and a 21 percent interest in a new
cable systems entity -- Time Warner Cable Inc. -- that will have about 10.8
million subscribers.

AT&T will yield to AOL Time Warner its 27.6-percent stake in TWE.

AOL Time Warner will end up with full ownership of Home Box Office Inc. and
the Warner Bros. studio assets and will assume TWE's interests in the WB Network
and cable channels Court TV and Comedy Central.

AOL also gets a three-year broadband carriage deal for its
Internet service over AT&T and, later, AT&T Comcast Corp. systems, when that merger
is completed later this year.

It would be the first AOL broadband carriage deal outside of Time Warner
Cable.

AT&T and AOL have been trying to unwind the TWE partnership for years,
but until today have been unable to agree on a value for AT&T's stake in the
partnership.

In the past, AT&T has valued its interest as high as $10 billion, while
AOL's estimate has been considerably lower.

Time Warner Cable Inc. is expected to be spun off in an initial public
offering in the first half of 2003.

Until that time, AT&T Comcast will hold its interest in the cable unit in
a trust, to avoid potential regulatory hang-ups.

AOL's high-speed Internet service is to roll out initially in AT&T
Broadband's Boston, Seattle, Indianapolis and Nashville markets, and 10 million
homes will have access to the service within two years.

Another 9 million AT&T Comcast homes would be added in future.

AOL Time Warner did not disclose terms of the AOL carriage deal. CEO Richard
Parsons said the company is negotiating with other operators and did not want to
tip its hand.

But details in published reports point to an arrangement that appears to be
heavily in favor of AT&T Comcast.

According to The Wall Street Journal, AOL Time Warner will pay
AT&T Comcast between $35 and $40 per month for each subscriber it signs
up.

In comparison, EarthLink Inc., the third-largest ISP in the country, pays
Time Warner Cable less than $30 per subscriber.

AOL also will give AT&T Comcast a portion of advertising and electronic
commerce revenue.

The deal addresses what has been one of Parsons' top priorities since
assuming the CEO job in May and removes a major overhang on AOL Time Warner's
stock. All three stocks rose early Wednesday.

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