NEW YORK–AT&T Corp., looking to fend off an unsolicited suitor for its cable business, is in preliminary talks with AOL Time Warner Inc. about a friendly deal to merge the two companies’ cable-systems operations, people familiar with the matter told The Wall Street Journal.
The talks between the No. 1 and No. 2 cable companies, respectively, come two weeks after Comcast Corp. made an unsolicited $40 billion stock-swap bid for AT&T’s cable business, known as AT&T Broadband. AT&T rejected that offer last week, saying it didn’t reflect the “full value” of the cable assets.
But in rejecting the Comcast offer, AT&T effectively put the cable business up for sale, saying it would “explore financial and strategic alternatives” and delay plans for an AT&T Broadband tracking stock.
Shortly after Comcast disclosed its bid, AOL and AT&T started talks. AOL’s co-chief operating officer, Richard Parsons, is representing the media giant, as he knows C. Michael Armstrong, AT&T’s chairman and chief executive. Gerald Levin, AOL’s CEO, has also met with Mr. Armstrong at least once to discuss the matter, according to a person familiar with the situation.
Mr. Parsons couldn’t be reached to comment. AT&T and AOL declined to comment.
To be sure, the talks between AT&T and AOL are at a conceptual stage and are very fluid, with no formal proposal on the table. As such, a deal may never materialize, people familiar with the matter warn. Furthermore, AT&T has had conversations with several media and cable-TV firms in its search for a white knight, and the AOL discussions don’t appear to have favored status at this point.
That said, these people say AT&T and AOL have discussed a scenario in which AT&T would spin off its broadband division and simultaneously merge it with AOL’s cable business, Time Warner Cable. In order for the transaction to be tax-free, AT&T shareholders would own at least 50% of the combined firm, and AOL itself would own roughly 45% and could conceivably have effective operating control of the company.
The structure being discussed is similar to Comcast’s proposal, whereby Comcast would buy AT&T Broadband, even though AT&T shareholders would own more than 50% of the shares. But in that scenario, AT&T’s board was troubled that the Roberts family, which has a controlling 86% interest in Comcast but has just a 2% economic interest, would own 1% of a merged firm but control about 45% of it. AOL and AT&T are discussing a scenario in which AOL would own 45% and control 45% of the votes.
As part of the complex deal, AOL would regain full ownership of Warner Bros. film studio and Home Box Office, both of which are now part of the Time Warner Entertainment partnership, which is 25.5%-owned by AT&T. AOL and AT&T have been in negotiations for months for AT&T to sell its stake in the partnership to AOL, but the two sides haven’t been able to agree on a price.
Copyright (c) 2001 Dow Jones & Company, Inc.