TWE DEAL COMES AS FCC WEIGHS CABLE OWNERSHIP RULES, OPEN ACCESS

While FCC Media Bureau Chief Kenneth Ferree called $9 billion deal “a positive development,” he said it changed nothing in terms of current proceedings, including pending AT&T-Comcast merger. He said he planned to send item addressing cable ownership questions to 8th floor by Nov., although he hoped it would be earlier. And while he acknowledged that disentangling AT&T’s assets from those of AOL-TW helped, Ferree said FCC’s staff was more interested in way AT&T-Comcast would insulate its TWE assets from rest of company, since TWE restructuring probably wouldn’t close until 2003 and AT&T Broadband-Comcast merger was scheduled to close before end of 2002. AT&T and Comcast had proposed placing TWE stake in separate trust that would be overseen by govt.-approved trustee until merged company could sell off TWE asset. “There’s still an asset there. They've restructured the asset. We still have to look at whether the trust instruments that they've proposed would adequately deal with any Communications Act concerns we might have, so I'm not sure it changes the dynamic that much,” Ferree said. To extent deal would appear to make sale easier, he acknowledged that it “makes it look like that’s very possible now.” He said, however, FCC can’t assume such sale as it analyzes merger: “We can’t work on the hope and prayer that at some day in the future they will not have this asset.”

FCC has put companies’ trust proposal out for public comment. Comcast is trying to place its pending merger and combined 22 million subscribers under FCC cap that stipulates single company can’t reach more than 30% of multichannel video programming distributor marketplace. That cap has been struck down by courts but Congress has mandated that there must be cap, so FCC is trying to come up with one that will withstand judicial scrutiny. Comcast and AT&T are trying to stay within bounds of whatever FCC comes up with.

Under terms of TWE deal, AT&T-Comcast will assume AT&T’s almost 28% interest in TWE upon closing of merger. That includes 21% equity interest, with less than 5% voting power in election of directors, in what would be new, AOL-TW- controlled cable company serving 10.8 million subscribers. Comcast and AT&T said restructuring would enable them to meet their regulatory commitments while raising cash to reduce debt. Both parties have promised FCC they will sell TWE asset as soon as possible. “As stated when we announced the merger with AT&T Broadband, monetizing the TWE assets has been a major priority. Today’s restructuring generates significant near-term liquidity that immediately strengthens AT&T Comcast’s balance sheet, leaving 21% of Time Warner Cable to be monetized over time,” Comcast Pres. Brian Roberts said. AT&T Broadband will receive $2.1 billion in cash and $1.5 billion in common stock of AOL-TW, valued as of time of closing.

New cable company, to be called Time Warner Cable Inc., will be formed from TWE’s existing cable properties and additional cable properties to be contributed by AOL TW, which will hold 79% interest in that company, which essentially will become subsidiary. AOL-TW will assume total ownership of TWE’s major content assets, including HBO, Warner Bros. and stakes in Comedy Central, Court TV, WB. AOL-TW also gets broadband carriage for AOL on cable system other than on its own Time Warner Cable systems. Under 3- year, nonexclusive agreement, AOL High-Speed Broadband service would be made available on AT&T Comcast cable systems, which pass 10 million homes. Companies didn’t release financial terms, but Comcast and AT&T Broadband said they were “comparable” with other recent carriage agreements they have entered. However, Wall St. Journal reported that carriage came at hefty price for AOL-TW, saying service would be offered for $54.95 per month, higher than most competitors, and would reap smaller profit margin of 27% because it would have to pay AT&T Comcast $35-$40 per subscriber.

Roberts said carriage deal was “another example of our commitment to offer broadband choice to consumers,” offering yet another signal to FCC regulators that Comcast believed so-called “forced access” was unnecessary when deals could be worked out in marketplace without govt. intervention. Ferree said he could draw no conclusions based on what companies announced, since they didn’t release financial terms. FCC probably will ask companies for those details, Ferree said. “I hope at some point, we'll have them in here and actually explain to us how this is going to work,” he said.

Time Warner Cable is expected to conduct IPO of common stock following restructuring, companies said. AOL-TW said it anticipated using first $2.1 billion raised in IPO to pay down cable company’s debt incurred to fund $2.1 billion cash payment to AT&T. AOL-TW CEO Richard Parsons, in conference call with analysts, said he hoped deal would make AOL-TW “a far more transparent and easier to understand company” and give it “a simpler structure that people can understand and frankly that we can manage better.” He said separating out cable assets into another company would give that new company -- with $8.1 billion in debt and preferred equity -- lowest debt leverage in industry and great strength “in a sector that likely will continue to consolidate,” indicating that new company could look to get bigger sometime in future. He didn’t say what acquisitions might be considered.

Carriage agreement announced would make AOL High Speed Broadband available on AT&T Comcast systems passing 10 million homes within 2 years after their merger closed. Key markets covered under agreement include Boston, Seattle, Indianapolis, Nashville. Companies also agreed to roll out AOL broadband on AT&T Comcast systems passing additional 9 million homes in future, subject to parties’ mutual satisfaction with arrangements. UBS Warburg analyst Christopher Dixon called carriage agreement “win-win” for all parties, saying agreement would expand AOL’s distribution and help AT&T Comcast drive further penetration.

Consumers Union and Consumer Federation of America, responding to deal, told FCC Chmn. Powell, FTC Chmn. Timothy Muris, and Asst. Attorney Gen. Charles James in letters that agreement would leave markets for both video and Internet “unduly concentrated.” Groups asked govt. to examine agreement to ensure that it was consistent with terms of previous FTC consent decree that allowed AOL and Time Warner to merge and FCC’s previous approval of merger of AT&T and Media One. CU Senior Dir. Gene Kimmelman and CFA Dir. of Research Mark Cooper said it was unclear whether proposed trust by Comcast and AT&T “will fully protect cable ratepayers and competitors from potential abuse.” Noting that TWE agreement would give nation’s No. 1 ISP entry to nation’s No. 1 cable company, groups questioned whether smaller ISPs and others would be harmed.