AOL TW Seeking Cable Spin-Off, to Write Down Billions Again

AOL Time Warner Inc. (AOL) is looking for a second-quarter spin-off of its cable TV operations, while at the same time preparing to write off several billion dollars on top of the record $54 billion charge it took last year.

AOL Time Warner Chief Financial Officer Wayne Pace told investors Thursday that the world's largest media company was ready to close by the end of January its Time Warner Entertainment deal with Comcast Corp. , which recently bought AT&T Broadband.

The deal to unwind a complicated partnership between the companies paved the way to spin-off the nation's No. 2 cable operator into a publicly-traded entity. AOL Time Warner is expected to own about 70 percent of Time Warner Cable after the spin-off.

Meanwhile, AOL Time Warner is preparing to take a charge of as much as $10 billion in the fourth quarter to reflect the reduced value of its America Online unit since its 2001 merger with Time Warner.

The unit, once called the crown jewel of the combined company, has struggled with a sharp slowdown in advertising spending and subscriber growth. A new management team cut financial targets again last month.

AOL Time Warner last year posted a record $54 billion charge, leading to the largest ever corporate quarterly loss. The charge was taken amid new accounting rules for goodwill and amortization and to reflect the decline in the value of the company since the $106.2 billion merger.

Many investors and analysts said the charge may further constrain AOL Time Warner's financial flexibility. Chief Executive Richard Parsons has said paying off some of the company's approximate $26 billion debt is a top priority.

While AOL Time Warner executives have said debt covenants would not be affected by the noncash charge, accounting experts say such charges can hurt a company's debt rating as well as its ability to borrow.

Large charges "could very well have material impact on debt covenants because it erodes net worth and net worth has some meaning in the world of debt covenants," said Robert Willens, an accounting specialist at Lehman Bros. "It reduces shareholder equity."

Media veterans said the looming charge was a reminder that merging America Online and Time Warner was a bad idea. The stock price is down 70 percent since the deal was completed.

Other companies that have taken massive charges include JDS Uniphase Corp., which took a $50 billion write-down in 2001 and a $5.6 billion goodwill and intangible asset write-down last year. Nortel Networks had a $14 billion write-down of acquisitions in the second quarter of 2001.

Standard & Poor's Ratings Services has said it may cut AOL's "BBB-plus" senior debt rating, its third lowest investment grade. Moody's Investors Service rates the debt an equivalent "Baa1" with a "negative" outlook, meaning the rating is more likely to be cut than raised.

"I wouldn't be surprised if they were downgraded, but it would be a culmination of events," said Jeff Cannon, a debt analyst at Banc One Capital Markets Inc. who rates AOL bonds a "hold." "I'm not sure this event on a stand-alone basis is enough for a downgrade but S&P has already put them on "watch negative."

But Moody's credit analyst Neil Begley does not expect even a large charge to have much effect on AOL's ratings, saying that it would not affect the company's ability to generate revenue or free cash flow.

Several media veterans said that the charge is another reminder that the AOL and Time Warner merger was not the best deal struck but that is already reflected in the stock price.

"The only issue in my mind is if the size of the charge would have any impact on any credit agreement and my guess is it will not," said Morris Mark, a media investor who has an interest in AOL Time Warner. "From a practical point of view, they won't do it until they have talked to the rating agencies (and ensured it won't hit ratings)."

Investors and analysts said they were more interested on how they restore growth at its AOL unit—something that is bound to take some time — and how its other businesses such as film, publishing and cable offset the slowdown.

"To me, what is important is that they continue to do what they say they are going to do: use all cash available to pay down debt and deal with the broadband switch," Cannon said.

Reuters and the Associated Press contributed to this report.