AOL Time Warner Inc. has decided to pay for German media group Bertelsmann's $6.75 billion stake in AOL Europe in an all-cash deal, calming investor concerns about a share payment, sources said Monday.

"AOL's shares have been under pressure, and there's quite a bit of volatility in the stock, so AOL Time Warner looked at its bank facility and decided it could absorb a cash payment comfortably," one source said hours before the Internet and media giant was due to update investors on its outlook in a gloomy market.

Bertelsmann is exercising an option to sell its 49.5 percent stake in AOL Europe to AOL Time Warner. As part of that deal, AOL Time Warner had the choice of paying for the stake partly in shares.

Jordan Rohan, analyst at SoundView Technologies, said he welcomed a cash deal because it would not dilute the stock and because the company has enough cash on hand that it will likely not have to tap the debt market.

"I am relieved," Rohan said. "It clears up confusion and fear in the minds of investors."

Shares in the company were trading up 75 cents, or 2.4 percent, at $32.70 in New York, recouping some of last week's lost ground on the perception the company will rein in 2002 key earnings expectations. The company's shares have fallen 45 percent since a high last year of $58.50.

AOL and Bertelsmann declined to comment.

With the AOL Europe deal no longer hanging over its shares, AOL Time Warner can focus on addressing investors' other concerns about its slowing Internet subscriber growth and recent management changes, analysts said.

AOL Time Warner is expected to discuss those issues as well as the impact of AOL Europe, accounting changes and the end of its iPlanet venture with Sun Microsystems Inc. later Monday in its first conference call since Chief Executive Gerald Levin appointed top deputy Richard Parsons to succeed him in May.

VALUATION

Sources said AOL Time Warner would pay for the AOL Europe stake in two tranches: $5.25 billion in January and $1.5 billion in July. Under the original deal, AOL Time Warner had to pay $2.5 billion of the total in cash but could chose whether to pay the remainder in cash or shares.

Some analysts said a cash deal was a natural given AOL's low share price, a low debt load and the fact that Bertelsmann does not want ownership in AOL Time Warner. Others had expected part to be paid in shares such as treasury stock, which Bertelsmann could easily place in the market for cash.

At $6.75 billion, analysts agreed that AOL was paying dearly for a deal that was agreed to in March 2000 at the height of the Internet boom.

"It's a rich price but strategically in three to five years it's important to own all of it," said Paul Kim, analyst at Kaufman Bros., noting the importance of the European Internet venture, which has 6 million subscribers, in the company's much-talked-about efforts to expand abroad.

Bertelsmann, which also owns the BMG music group and Random House publisher, invested $50 million in America Online in 1994, which together with its subsequent stake in AOL Europe in 1995, turned into a bonanza of billions of dollars.

With Bertelsmann finally out of the picture, AOL is expected to build up its AOL Europe unit with further mergers and acquisitions, a London-based Internet analyst said.

"I think AOL Europe will be gearing up for an IPO. It won't be immediately -- maybe, two years out," the analyst said. "But before they do so, they'll need a portfolio of assets."

CONFERENCE CALL

Wall Street analysts expect Monday's call to reflect the more conservative tones of new Chief Financial Officer Wayne Pace and Parsons, who has said he believes in under-promising and over-delivering.

A conservative tone would contrast the bold growth targets AOL Time Warner set out a year ago and had to eventually cut in September after months of holding fast to them despite the advertising slowdown.

"Whatever number they settle on I think it's going to be one that can be achieved and beaten this year," Hodge said, adding that he expects the company to disclose several details about AOL Europe as well, including its revenues, losses and future plans.

AOL Time Warner said in September it expected double-digit growth in cash flow, or earnings before interest, tax, depreciation and amortization (EBITDA), in 2002. But most Wall Street analysts now expect the company to rein in those expectations to low double-digit or even single-digit growth.

"There is fervent speculation that they will lower guidance. There has been a massive rotation out of AOL Time Warner stock into Viacom and Disney," Kim said. "If they don't (lower expectations), then the stock will be O.K. for 2002."