In an effort to become the nation's largest cable operator, AOL Time Warner proposed late last week to merge its cable operations with AT&T's, executives close to the negotiations said on Sunday.
While AOL has not yet made a formal merger proposal for AT&T's cable business, which is called AT&T Broadband, the proposal is the first signal that AOL is earnestly pursuing a deal.
AOL's proposal was precipitated, in part, by the Bush administration's decision last week to drop demands for the breakup of Microsoft, potentially improving the prospect that regulators would approve an AOL-AT&T Broadband deal, the executives said.
In addition, the changing mood in Washington over regulation of large media companies also provided an impetus for AOL to make its approach.
On Friday, a federal appeals court signaled its intention to strike down two regulations that for decades have prevented the nation's biggest broadcasters, cable companies and media conglomerates from expanding by taking over local television stations.
AOL has been discussing the possible merger of its cable operations with AT&T Broadband since July, when Comcast Corp made a unsolicited offer for AT&T Broadband that was rejected.
But Comcast's offer put AT&T Broadband in play and now AT&T's board must decide whether to proceed with its original plan to spin off the company or sell it to a competitor.
AT&T has also held talks with Cox Communications, which has also yet to make a formal bid but is still discussing several possibilities, as well as Walt Disney Corp and Charter Communications, according to the executives.
AOL's proposal calls for AT&T to merge AT&T Broadband with AOL's cable business, the executives said. AT&T shareholders would own about 60 percent of the combined company, while AOL's shareholders would own about 40 percent, the executives said.
That would make the transaction tax-free to AT&T's shareholders, an important negotiating point in getting the approval of AT&T's directors, and would give AT&T majority control.
AOL's proposal is expected to be presented to AT&T's board when it meets Sept. 20, the executives said. No deal is imminent, the executives said.
A spokesman for AOL and a spokeswoman for AT&T declined to comment.
Under its proposal to buy AT&T Broadband, Comcast would own no more than 1 percent of the combined company but would have about 42 percent of the vote, which could be considered effective control.
If AT&T were to agree to a transaction with AOL, the deal would be a major blow to Microsoft, which wants to play a bigger role in the cable business and is an investor in Comcast.
Microsoft has also talked with AT&T and would consider a partnership with a rival bidder to keep AOL from winning control of AT&T Broadband, executives close to Microsoft said.
Even in a more relaxed regulatory environment, a deal between AOL and AT&T would face tough scrutiny.
The combined company would have more than 25 million subscribers, dwarfing its next largest competitor, Comcast, which has 8.5 million subscribers.
Some large investors in AOL have expressed concern that a deal with AT&T could be too risky and freeze the company for more than a year while the transaction would be under review by regulators.
Word of AOL's proposal first emerged on Friday when the chairman of Liberty Media, John Malone, mentioned AOL's discussions with AT&T at an investor conference.
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