August 14, 2003 3:05 PM PDT

AOL, Comcast may unravel cable ventures

The complex financial relationship between Comcast and AOL Time Warner could begin to unravel this month due to a horse trade worth $5 billion in cable subscribers shared between the companies.

AOL Time Warner on Wednesday disclosed that after Aug. 31, it can explore ways to either buy or sell to Comcast its 50 percent stake in Kansas City Cable Partners, a 300,000-subscriber system, according to a filing with the Securities and Exchange Commission. In 2004, the companies can consider ways to buy or sell their stakes in Texas Cable Partners, which has 1.2 million subscribers.

Both Comcast and AOL Time Warner have publicly expressed their desire to turn these joint ventures into wholly owned divisions. The question is which will get the subscribers to grow market share and which will get the cash.

"Both companies want to be consolidators, and they want to increase their size," said David Joyce, an analyst at Guzman & Co.

During an earnings call with analysts last month, AOL Time Warner CEO Richard Parsons said the company was in "constant communications and discussions" over the procedure. Parsons also said it's in AOL Time Warner's interest to grow its cable market share rather than diminish it.

An AOL Time Warner representative declined to comment beyond what was already stated in the SEC filing. A Comcast representative did not immediately comment on the filing.

These deals could offer a critical boost for either company. AOL Time Warner has been exploring the possibility of spinning out Time Warner Cable, the nation's second-largest cable network, and continues to earmark the division as a growth area. However, the potential initial public offering of Time Warner Cable has been delayed due to ongoing investigations by the SEC and the Department of Justice over the America Online division's accounting practices.

Should the IPO go through, Time Warner Cable is expected to raise billions of dollars, reducing AOL Time Warner's $24.2 billion mountain of debt.

Comcast, meanwhile, is continuing to integrate the vast network of cable systems that it acquired from AT&T Broadband last year. Since becoming the nation's largest cable system, Comcast has heightened its ambitions. The company has been publicly mulling a bid for Vivendi Universal's entertainment assets and aggressively promoting its high-speed Internet and voice services.

AOL Time Warner and Comcast could find ways to reduce Comcast's 21 percent ownership stake in Time Warner Cable. Analysts say swapping subscribers for investment percentage is another likely scenario.

Cable networks have made significant gains in bundling their video services with broadband Internet access and local phone calls. Demand for broadband remains high, and cable continues to be ahead of the Baby Bells, which have struggled to grow their digital subscriber line numbers.

Wall Street analysts value cable systems at about $3,275 a subscriber, according to Guzman's Joyce. Based on that average, the base value of the Kansas City and Texas stakes is nearly $5 billion, or about $2.5 billion for each company. However, the value of these subscribers will likely increase given premiums typically paid for subscriber acquisitions.

"I think it will be more of a strategic decision rather than a financial decision," said Mark May, an analyst at Kaufman Bros. "The parties have said it makes more sense to be wholly owned than joint ventures."

 

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