Newhouse Could Claim 2M Subs

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AOL Time Warner Inc. and the Newhouse family are in negotiations regarding a seven-year old cable partnership — Time Warner Entertainment-Advance/Newhouse —which could result in the removal of about 2 million cable subscribers from Time Warner Cable.

The Newhouse family — owners of privately held publishing giant Advance Publications Inc. — entered into the TWE-A/N partnership in 1995. They contributed about 1.4 million cable subscribers, mainly via systems in upstate New York.

TWE-A/N now counts about 6.7 million subscribers, of which the Newhouses own 33 percent.

Counting other system partnerships — including a 50-50 joint venture between Time Warner and AT&T Corp. for 1.1 million subscribers in Texas — A/N's 33 percent interest would work out to 2 million subscribers, which could be worth about $8 billion.

News of the talks came to light last week in a report in The Wall Street Journal.

The Newhouse family's motivation for the negotiations is unclear, and neither side is talking.

COX IS WATCHING

Wall Street speculation about the negotiations has been rampant, with some in the investment community guessing that the Newhouse family could unwind the partnership, then take the 2.1 million subscribers and either sell them to the highest bidder or partner with another MSO, possibly Cox Communications Inc.

In the past, sources said, Cox has expressed an interest in the A/N systems. Cox spokeswoman Amy Cohn declined to comment.

Last week, Fitch Ratings downgraded Cox's debt ratings a notch. It said debt from past acquisitions had not been trimmed as rapidly as expected.

Cox remains committed to a strong investment-grade debt rating, so Fitch said it assumes any further cable system deals would be financed through the sale of non-core assets, principally Cox's 25 percent stake in Discovery Networks. One analyst last week said he'd value Discovery at about $20 billion, or about 20 times estimated 2004 cash flow.

Advance/Newhouse Communications president Robert Miron declined to comment on negotiations.

"We're just not going to talk," Miron said. "We're a private company, and we're just not going to say anything."

AOL Time Warner officials referred all questions on the Newhouse partnership to Time Warner Cable vice president of corporate communications Michael Luftman, who also declined comment.

Several analysts and investment professionals said they've contacted AOL Time Warner management for further information, only to be rebuffed.

"They said to wait until the 10-K [annual report] comes out," said one investment banker who asked not to be named. "They don't want to negotiate publicly."

AOL Time Warner is expected to file its annual report on or before March 31.

According to SEC documents, Newhouse and AOL Time Warner have had the right to dissolve the partnership since April 1, 1998 — the three-year anniversary of the original agreement. And each party has the right to negotiate the terms of the partnership every April 1.

BILOTTI'S VIEW

"On April 1, [Newhouse] can withdraw their subscribers from that partnership on a tax-free basis," said Morgan Stanley & Co. cable analyst Richard Bilotti, speaking during a conference call with clients to discuss Morgan Stanley's revisions to its stock-rating system. "From the standpoint of valuing AOL Time Warner, I don't care one way or the other, because Time Warner never owned those subs."

According to Bilotti, A/N could opt out of the partnership by either taking subscribers, cash or AOL stock.

"I would suspect they [Newhouse] ask for the subscribers back," Bilotti said.

The Newhouse negotiations come at a tricky time for AOL Time Warner, which has been trying to boost its cable presence after losing out to Comcast Corp. in December's bidding for AT&T Broadband. Although it's currently the No. 2 MSO in the country, with 12.8 million subscribers, losing the Newhouse subscribers would drop AOL Time Warner to 10.8 million customers — well behind the 22 million subscribers AT&T Comcast Corp. will have if the merger is approved later this year.

In addition, those 2 million subscribers represent about $1.1 billion in annual revenue and $600 million in annual cash flow for AOL Time Warner. The company would be hard pressed to make that up through its other operations.

Both AOL and A/N have amended the partnership at least three times since 1998. The latest revision — made last year — required Time Warner Cable to tell Newhouse about its carriage agreements with AOL.

At least one cable-industry source said the Newhouse family's threat to take control of their subscribers is an annual negotiating tactic. The source doubted the Newhouses would actually take control of the cable properties.

"They always threaten that," the source said. "I think part of this is just blustering."

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