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K.C. Neel
Time Warner may be overplaying its hand with heavy-handed negotiating tactics, and some analysts believe it could negatively affect the company's proposed merger with America Online.
AT&T wants the sale of its 25.5% stake in Time Warner Entertainment to be a condition of the AOL Time Warner deal, since AT&T hasn't been able to come to terms with Time Warner on its own.
As part of its MediaOne Group acquisition, AT&T agreed earlier this year to either divest its TWE stake; sell its programming arm, Liberty Media; or dump cable systems counting 9 million customers. The company must make its decision by Dec. 15 and execute the divestiture by May 19.
Although none of the choices is particularly palatable to AT&T, the least onerous is the sale of TWE.
Shedding Liberty now would result in a huge tax bite, and AT&T doesn't want to unload the cable systems because it's trying to build a national network of bundled voice, video and data services.
At first, AT&T executives figured its ownership in TWE could be used as leverage in cutting a local phone deal with Time Warner. That hasn't proven to be the case, says Precursor Group CEO Scott Cleland.
"That asset is serving no purpose for AT&T at this point," Cleland says. "It hasn't given AT&T the leverage they thought it would, and it's limiting their liquidity and ability to restructure. They need to shed it. But Time Warner is playing hardball."
Cleland and some other analysts believe Time Warner's hardball tactics could backfire and force regulators to deal more harshly with the company's proposed merger with AOL.
Walt Disney, NBC and other content providers have already expressed concern over Time Warner's tough negotiating habits to regulators. Time Warner's inability to deal with AT&T is just another example of Time Warner's heavy-handedness, observers say.
Aside from getting out from underneath the regulatory issues surrounding its acquisition of MediaOne, the sale of the TWE stake could go a long way toward helping AT&T fund its expansion and pay off its debts.
"Don't forget," Cleland says, "AT&T owes Comcast and Cox (Communications) $2 billion to get out of the Excite partnership. They could use that money for a whole host of things."
It's unclear what AT&T's stake in TWE is worth. The partnership includes most of Time Warner's cable assets, Home Box Office and Warner Bros. studio. The cable subscribers alone could fetch more than $14 billion at $5,000 a customer.
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