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AOL Time Warner to take big charge

AOL Time Warner Inc. plans to take a $54-billion charge, believed to be the largest in corporate history, reflecting the declining value of AOL's purchase of Time Warner last year, according to the company's public filings Monday.

The huge number, a paper figure arising from new accounting rules, has no bearing on the company's cash flow or day-to-day operations. But it holds a symbolic value: At the height of the Internet frenzy, America Online, with its turbocharged stock price, paid a steep price for Time Warner.

When the all-stock merger was announced in January 2000, the companies valued the deal at $147-billion, based on AOL's average share price of about $67. By the time the deal closed a year later, AOL's stock had tumbled to about $43. Monday, it closed at $24.21, down 29 cents, in New York Stock Exchange trading.

"It's a reflection of the Internet bubble," said Youssef Squali, an analyst at First Albany Corp. in New York. "It paid too much for Time Warner assets and then some of these assets two years later are reassessed to be a lot less."

Squali, however, likes the stock. He recently upgraded it to a "strong buy." For AOL Time Warner's first quarter, expected to be announced in the third or fourth week of April, Squali has projected $9.37-billion in revenue, essentially flat from a year ago, and earnings before interest, taxes, depreciation and amortization, or EBITDA, of $1.99-billion, also virtually flat from the year-earlier period.

AOL Time Warner officials declined to comment Monday. But the company has repeatedly said the charge will not affect the company's cash position.

Some Wall Street observers were even more emphatic. "This is less than a non-event," said Raymond Katz, an analyst with Bear, Stearns & Co. in New York.

Monday's ho-hum reaction was due in part to built-in expectations. In January, the world's largest media company had warned it would take a noncash charge ranging from $40-billion to $60-billion, a result of new accounting rules about goodwill.

Goodwill represents how much a deal's purchase price exceeds the book value of the acquired company's assets. Under old accounting rules, companies wrote down such goodwill gradually over several decades. But under new accounting rules, the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 142, companies have discontinued the amortization of such goodwill.

This is how AOL Time Warner arrived at the $54-billion charge: When the AOL-Time Warner deal was announced two years ago, the goodwill involved in the transaction was valued at $128-billion, based on AOL's $67 share price.

Today, because of market uncertainty, the weak state of the economy and AOL Time Warner's lower projected cash flow in the indefinite future, its goodwill is worth about $74-billion. The difference in the value in goodwill is $54-billion.

Putting pressure on AOL Time Warner's stock in recent months has been a batch of weak numbers, including its slowing online subscriber growth rate and advertising revenue. In its fourth quarter, the company reported a widening loss and a tepid 4 percent revenue gain. For the first quarter, the company said revenue and EBITDA are expected to be flat.

Possibly adding to Wall Street concerns would be if AOL Time Warner ends up losing almost 20 percent of its cable subscribers.

Seven-million of AOL Time Warner's roughly 12.8-million cable subscribers are held in a partnership with a group controlled by the Newhouse family, best known for controlling the Advance magazine empire. The New York Times reported that the Newhouse family is concerned AOL Time Warner could enrich its Internet and television programming operations at the cable unit's expense.

Monday's filing said that under the partnership's terms, the family may choose to exit the venture as soon as Sunday. Moreover, the report said that if the Newhouses choose to exit, the partnership's assets are to be split into three equal pools, with the family taking one of them. Were the 7-million subscribers split equally, that would come to 2.3-million customers.

Among the major markets served by the partnership are San Diego and Tampa. Losing control of such major cable systems would be a serious blow to AOL Time Warner, which is why the company is negotiating with the Newhouses to keep them within the fold.

As part of those negotiations, AOL Time Warner may end up buying the Newhouses' minority stake in the Roadrunner cable modem venture, according to Monday's filing. AOL Time Warner already owns about two-thirds of Roadrunner, but the company currently reports its portion of Roadrunner's losses as part of the "other income" line on its financial statements. But if AOL Time Warner acquired the Newhouse stake, the company would then have to consolidate Roadrunner's results with those of the other core AOL Time Warner operations, according to Monday's filing. Roadrunner had an operating loss of $280-million last year on revenue of $220-million.

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