TALKING UP THE DEAL

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Case Says Street Will See the Light

America Online Inc. chairman Steve Case spent the betterpart of a conference call with analysts last week, which was originally set up to discussthe company's second-quarter results, justifying the pending merger with Time WarnerInc.

Since the stock deal was announced Jan. 10, AOL has takensome heat from investors who began selling their stock. The company's shares havefallen about 14 percent since Jan. 10, closing at $64.50 each Jan. 19, down $9.25 fromtheir Jan. 7 close of $73.75. The stock has begun to stabilize, though, closing at $64.06last Thursday.

Case addressed the stock price during the call, saying thathe doesn't expect the slide to last long. "We recognized when we announced thedeal that people were pretty surprised," he said. "The first week [after theannouncement], they were surprised by it, but my sense is that it's going to startsettling down."

Case said that once investors begin realizing the benefitsof the Time Warner merger and the growth rates the combined company will enjoy comparedwith others in the industry, the stock will stabilize.

He added that the combined company will have an earningsbefore interest, taxes, depreciation and amortization (EBITDA) -- or cash flow -- growthrate of about 30 percent. That just about splits the difference between AOL's 50percent growth rate and Time Warner's 15 percent growth rate.

AOL chief financial officer J. Michael Kelly also claimedthat the company is being unfairly valued even though its growth rates are similar tothose of other companies with much higher valuations.

"If you look at Microsoft [Corp.], Cisco [SystemsInc.], Oracle [Corp.] and others -- the market leaders in their segments -- their expectedEBITDA growth rates are either lower than our targets or roughly the same as the new AOLTime Warner [Inc.]," Kelly said. "Yet their shares have significantly higherEBITDA multiples than the applied multiple today for AOL TW."

Case also tried to dispel any fears that analysts orinvestors may have about management synergy, adding that executives from both companieshave already met several times, and they expect the transition to go smoothly.

Time Warner chairman Gerald Levin will assume the role ofCEO of AOL Time Warner once the deal is closed by the end of the year. And though Levinwill be in control of day-to-day operations and most executives will report to him, Casehas insulated four of his top executives from any skirmishes with the new CEO.

According to Securities and Exchange Commission filings,four top AOL executives -- vice chairman Kenneth Novack, senior vice president of globaland strategic policy George Vradenburg, public-relations consultant Kenneth Lerer andchief technology officer William Raduchel -- will report directly to Case. They can onlybe removed with his approval or upon action of the board of directors.

Adding to the valuation and management-culture questions,the deal also brings together two unlikely partners -- AOL and AT&T Corp. -- whichhave been at loggerheads over the open-access issue for several months.

Through its pending merger with MediaOne Group Inc.,AT&T gains a 25.5 percent stake in Time Warner Entertainment, which includes most ofTime Warner's cable assets, its Road Runner high-speed-data-service stake and suchcontent assets as Home Box Office and the Warner Bros. studios.

Although Time Warner has said the AOL merger will have noeffect on TWE talks, some analysts speculated that another company may complicate thedeal: Cablevision Systems Corp.

According to some analysts, AT&T may be trying to wresta greater ownership percentage in Cablevision's cable operations -- it currently ownsabout 33 percent -- which it could then fold into TWE in exchange for a greater percentageof that partnership.

That scenario would solve two problems. It would give AOLTime Warner a stake in the cable operations of the entire New York metropolitan area,where Cablevision has 2.8 million subscribers. AT&T could also get a telephonyagreement with Time Warner --which the two have been discussing since last February -- andAOL could get greater carriage.

Adding to the complexity is AT&T's ownership ofdata-over-cable service Excite@Home Corp. and TWE's stake in competitor Road Runner.

AT&T stands to gain a 32 percent interest in RoadRunner -- MediaOne's interest in the service -- after its purchase of MediaOne closeslater this year. Couple that with AT&T's nonvoting 58 percent stake inExcite@Home and AT&T would exert huge influence in the two prominent broadband-cableservices.

Although Excite@Home and Road Runner do not currentlycompete, they could once exclusivity agreements expire with Excite@Home, beginning in2002. This could present a major problem for AOL, which has been vocal in the past aboutopening access to cable's broadband pipe.

AT&T could opt out of its stake in Road Runner, butthat could prove costly. MediaOne initially invested $1.5 billion in Road Runner, but thatstake has appreciated greatly -- some say by as much as 10 times -- and a buyout could beprohibitive to AOL Time Warner.

Although the AOL-Time Warner merger creates a formidableopponent to Excite@Home, chairman Thomas Jermoluk -- while saying the merger virtuallyputs an end to the open-access fight -- added that it has little effect on his business.

"We have twice as many broadband subscribers as RoadRunner, three times their size in North American footprint and nearly four times theirsize worldwide," Jermoluk said in a conference call with analysts.

"Today, our broadband footprint overseas is 13 millionhomes, all of them under exclusive seven-year contracts," he added. "Together,AOL Time Warner's international footprint is exactly zero. As AOL Time Warner workstoward regulatory approval, we will do what we have been doing all along, quarter byquarter: growing subs, service levels and customer satisfaction."

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