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Time Warner Deal Partners
America Online With AT&T
By LESLIE CAULEY
Staff Reporter of THE WALL STREET JOURNAL
NEW YORK -- In buying Time Warner Inc., America Online Inc. finds itself with a surprising partner: arch-rival AT&T Corp.
AOL and AT&T will be linked through a separate media partnership called Time Warner Entertainment, which consists of Time Warner's cable-TV systems -- Home Box Office, Warner Bros. movie studios and Road Runner, a high-speed Internet access service that works over cable lines. Time Warner Entertainment, or TWE, is majority owned by Time Warner (which, of course, AOL is acquiring), and 25.5% owned by cable giant MediaOne Group (which AT&T is buying). Thus, two separate marriages are making cousins out of AT&T and AOL.
Problem is, AT&T and AOL have been at serious odds in the marketplace. Each is vying to lead the emerging "broadband" revolution -- a big reason AT&T is buying MediaOne, and AOL is buying Time Warner. Each hopes to use cable-TV lines to offer customers voice, high-speed Internet and video services.
Opposite Views
AOL and AT&T also have polar-opposite views of the "open access" issue, AOL parlance for the notion that cable companies should be forced to lease out their cable-TV lines to Internet service providers such as AOL at low rates. AT&T and its peers have balked at that idea, calling it little more than "forced access." Publicly, each has painted the other as monopolistic and anticompetitive. Some cable operators think AOL, based in Dulles, Va., will soften its position now that it is buying Time Warner and becoming a cable operator itself.
Then there is the Road Runner issue: AT&T, the nation's biggest cable-TV operator, already has a major stake in Excite At Home Corp., a Road Runner rival that is carried exclusively on AT&T cable systems. (This exclusivity expires in 2002.) Road Runner, which is controlled 50-50 by Time Warner and MediaOne, and Excite At Home don't currently compete -- but they could later on down the road, depending how the broadband market unfolds. So once the MediaOne deal closes, AT&T would have a big influence over both services, a situation that might not sit so well with regulators, much less AOL.
The wild card is the Justice Department, which is reviewing the AT&T-MediaOne deal. Many are betting that antitrust regulators won't let AT&T keep stakes in both At Home and Road Runner, and could force AT&T to sell one of them. Regulators, concerned about AT&T's growing influence over broadband in general, could force AT&T, based in Basking Ridge, N.J., to cash out of TWE altogether, or they could approve the deal with no conditions. The Justice Department doesn't comment about ongoing investigations, but regulators are said to be focusing on the Road Runner-At Home issue.
Cable Systems Only
As for Time Warner, it is biding its time until regulators make a decision. If the Justice Department orders AT&T to pull out, that could give Time Warner major leverage over how TWE will be restructured. Even before AOL came along, Chairman Gerald Levin had said he would consider converting TWE into a partnership involving only cable systems. But first, Time Warner will have to work things out with AT&T -- which will likely have a list of its own demands.
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Chief among them, no doubt, is a phone pact. For more than a year, AT&T has been pushing to cut a deal to use Time Warner's cable lines for local phone service. AT&T and Time Warner announced such a pact a year ago, but were never able to reach final terms.
The AOL deal has added even more complications. Any AT&T-Time Warner phone pact will now have to pass muster with AOL -- which might not be so keen on giving AT&T a helping hand on broadband. It's also possible that AOL, anxious for access to AT&T cable systems, might find a way to work out a deal. There's a chance the two giants could even wind up becoming major customers of each other.
Toning Down the Rhetoric
Publicly, Time Warner has said it is happy to have AT&T as a partner in TWE, particularly since AT&T won't have any management rights over TWE's cable-TV systems or programming assets. Likewise, AT&T has said it sees a lot of financial benefits to being a part of TWE as opportunities for broadband expand -- even if it is just a passive investor. AOL, eager to get its blockbuster deal approved by federal regulators, has toned down its rhetoric on "open access" and stopped, for now, its public criticism of AT&T.
Eliminating AT&T from the TWE partnership, if that's what Time Warner and AOL have in mind, could prove expensive. MediaOne's original $2.5 billion investment in TWE has dramatically increased in value thanks to a steep run-up in cable values. Just before the AOL deal was announced, some valued MediaOne's TWE stake at more than $15 billion. Since the AOL deal was announced, some peg the value at more than $20 billion -- and climbing. "The longer Time Warner waits, the more expensive it gets," noted one person close to Time Warner.
Even if AT&T doesn't get its hand forced by regulators, it could still decide to take the money and run.
Under the TWE partnership agreement, AT&T will be eligible to begin converting its TWE investment into cash or stock beginning next January. (This "monetizing" option comes around once every 18 months.) Under the process, several independent estimates of the value of AT&T's TWE stake would be obtained, and a price agreed upon. If AT&T decides to proceed, Time Warner would have the option of buying out AT&T's full stake, even if the telecom giant only wants to sell a portion of it. Or AT&T could decide to stay put, forcing AOL and Time Warner to tough it out.
--Martin Peers contributed to this article.
Write to Leslie Cauley at leslie.cauley@wsj.com
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