Locked in talks over the fate of their joint venture of Time Warner Entertainment, AT&T and AOL Time Warner agreed on Monday to ask Bank of America to withhold its opinion on how much AT&T's stake is worth, according to executives close to the companies. The request was a sign that the companies expect to reach a settlement within weeks on dissolving the venture.
While AOL has tried to persuade AT&T to swap its 27.3 percent of Time Warner Entertainment for a stake in a newly created Time Warner Cable operation, AT&T wants at least $1 billion in cash and billions of dollars in stock in the parent AOL Time Warner in addition to a stake in the cable subsidiary, according to people close to the negotiations.
AT&T has been trying for years to convince the company that is now AOL Time Warner to buy out its stake in Time Warner Entertainment, a complicated partnership that includes the HBO pay-television operation, the Warner Brothers film studio and most of AOL Time Warner's cable-TV systems. AT&T's stake is estimated to be worth from US$7.5 billion to US$9.5 billion. AT&T has threatened to make the unit a public company, a path that AOL hopes to avoid, because it wants to retain control of HBO and Warner Brothers.
Unable to come to terms, the companies asked the Bank of America to estimate the value of AT&T's investment. If the two companies are unable to reach a settlement, AOL would have to either allow Time Warner Entertainment to go public or buy out at least a part of AT&T's stake for the price set by the bank.
The bank was scheduled to deliver its decision on Monday but the two companies told it to "not open the envelope," in the words of one executive close to the decision.
Instead, the companies felt that they were close to a deal, the executive said, adding that the figurative envelope could be unsealed later if the companies reached an impasse. In addition to AT&T and AOL Time Warner, Comcast, the No. 3 cable company, is a crucial participant in the talks because it has an agreement to acquire AT&T's cable operation, including its stake in the entertainment unit.
In recent months, AOL Time Warner has tried to persuade AT&T to swap its interest in Time Warner Entertainment for shares in a newly created Time Warner Cable operation, which AT&T could then sell. That would let AOL regain sole control of HBO and Warner Brothers and part with AT&T without using any cash.
If there is a deal, however, it will not be so simple. First, AT&T wants at least US$1 billion in cash up front from AOL Time Warner to help protect AT&T from the risks of trying to sell a big block of cable shares at a time when stocks are slumping. Second, and perhaps more important, people close to the negotiations said, AT&T wants shares in the parent AOL Time Warner in addition to shares in the new Time Warner Cable.
For instance, the companies may decide that AT&T's stake in Time Warner Entertainment is worth US$8 billion. In that case, one possibility is that AT&T would receive US$1 billion in cash upon signing the deal some time in August, US$3.75 billion in AOL Time Warner shares over the next few months, and another US$3.75 billion in Time Warner Cable shares to be sold in a public offering some time next year, for a total of US$8.5 billion. AT&T would agree to sell the parent company shares within, say, a year.
AT&T appears to want shares in the parent AOL Time Warner for a couple of reasons. First, AOL shares are a security that AT&T knows it could sell at any time, while it could take until next summer for a Time Warner Cable offering to reach the market. Second, AT&T may be thinking that AOL Time Warner's shares, which closed Monday at US$11.58, are cheap right now. If the shares rose in value, AT&T could profit.
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