Time Warner Cable IPO on Hold

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The much-anticipated initial public offering of AOL Time Warner Inc.’s
cable-television unit has been put on indefinite hold, but it could be restarted
if the parent company feels the need to have a cable-only currency to help it
grow its MSO footprint, chairman and CEO Dick Parsons told analysts Wednesday
morning.

The Time Warner Cable IPO was expected to generate as much as $4 billion. But
Parsons, speaking to analysts in a conference call discussing second-quarter
results, said the urgency to raise that money has diminished.

Investors apparently didn’t feel the same way, driving down AOL Time Warner
stock by nearly 7% ($1.14 per share) to $15.71 each Wednesday.

A sluggish stock market and an ongoing investigation by the Securities and
Exchange Commission into some of the accounting practices of its America Online
Inc. Internet unit have also held up the cable IPO, which was expected by the
end of the year.

AOL said in a prepared statement that the SEC has informed it that it
considered the accounting incorrect for a pair of transactions between AOL and
Bertelsmann AG last year involving about $400 million in advertising
revenue.

The company added that its accountants considered the accounting of the
transactions to be appropriate and it is continuing to talk with the SEC.

AOL said in the statement that given the SEC’s conclusion, "It is likely that
the SEC would not declare effective any registration statement of the company or
its affiliates, such as the potential initial public offering of Time Warner
Cable Inc., until this matter is resolved."

Parsons told analysts Wednesday that when AOL Time Warner first announced its
intent to issue the IPO last year, the media giant had serious balance-sheet
issues.

But with improved performance and the sale of two assets -- its 50% interest
in cable network Comedy Central for $1.225 billion and the pending sale of its
DVD- and CD-manufacturing unit for $1.05 billion -- coupled with a $760 million
settlement with Microsoft Corp., AOL Time Warner doesn’t need the IPO cash as
much as it did last year.

"Part of what was involved behind the cable IPO was balance-sheet
management," Parsons said on the call. "As we looked at the menu of things we
could move on, the balance-sheet-management issues have evaporated. We are going
to get to our objectives without that."

Parsons added that the cable IPO may make sense if AOL Time Warner decides
that a cable-only currency will enable it to make acquisitions.

"We like the cable business," Parsons said. "As we think about 2004, 2005 and
2006, we would like to have a bigger footprint in the cable business. We think
it’s a business that is going to be consolidating over time, and we would like
to be a player in that business. There may well be strategic reasons to have a
cable-only currency in which to play."

Comcast Corp. -- which owns 21% of Time Warner Cable through the
restructuring of the Time Warner Entertainment partnership last year, and which
is a partner with Time Warner Cable in cable joint ventures in Kansas City and
Texas -- could force an IPO. But Parsons hinted that the two MSO powerhouses are
working toward an alternative arrangement.

"We are in constant communication as to how to unscramble the remaining parts
of that egg," Parsons said. "[Comcast president] Brian Roberts and his team are
very sophisticated. They have a lot of flexibility in time. They’re not feeling
time constraints; we’re not feeling any time constraints. We’re looking for ways
to move them closer to their goal, which is ultimately to exit those
relationships, consistent to our goal, which is to not shrink but, over time, to
grow our cable footprint."

Parsons was encouraged by AOL Time Warner’s ability to reduce leverage -- net
debt for the quarter was about $24.2 billion, down from $26.3 billion in March
-- and the company is on track to meet its goal of slashing debt to $20 billion
by the end of next year.

For the quarter, AOL Time Warner reported a 6% increase in revenue and a 6%
gain in operating income before depreciation and amortization (also known as
cash flow), fueled by strong growth at its cable systems and networks.

For the quarter, cable revenue was up 9% to $1.9 billion and operating income
before depreciation and amortization was up 11.4% to $752 million. Basic-cable
subscribers rose 0.9% (117,000 customers) during the period to 10.9 million.

Time Warner Cable added 136,000 digital subscribers and 170,000
high-speed-data customers in the period.

At the networks -- which include cable channels and The WB Television Network
-- revenue rose 10.1% to $2.2 billion and cash flow declined 14.5% to $359
million after a one-time charge of $178 million related to its winter sports
teams. Without that noncash charge, network cash flow would have increased 28%.

At the AOL unit, subscribers continued to decline -- by 846,000 to 25.3
million in the period -- as AOL churns off unprofitable narrowband customers and
rolls out its broadband Internet product.

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