TW may hold key to MediaOne acquisition

As AT&T grapples with regulators over cable ownership issues sparked by its agreement to buy MediaOne Group, Time Warner is trying to hide a smile that may lead to a stake in Cablevision Systems.

Time Warner is involved in the AT&T deal because MediaOne owns 25% of Time Warner Entertainment, a venture of cable systems plus other key assets such as Warner Bros. and HBO. Time Warner has wanted to unwind that partnership for years — and with its partner on the defensive right now, it’s sitting pretty, according to Wall Street analysts and industry insiders.

Rights ceded

Already, MediaOne had to give Time Warner a letter relinquishing its 50% management rights to the TWE cable properties. Time Warner plans to consolidate TWE in its next quarterly financial report for the first time. And that letter is binding even if the AT&T/MediaOne deal falls through.

“We have a lot of leverage given the fact that the government is probably going to ask (AT&T) to do something” if the MediaOne deal is to go forward, said one Time Warner exec.

This is all “interesting and potentially significant for Time Warner,” agreed analyst David Londoner of Schroder & Co.

AT&T’s problem is that the FCC appears increasingly unlikely to loosen the current 30% cap for national ownership of cable systems. It may also leave standing a rule that attributes ownership of a system to a stake of 5% or more. With MediaOne, AT&T would own more than 40% of U.S. cable systems, far over the limit, and be forced to abandon MediaOne or divest some assets.

Possible scenarios

Londoner outlined several possible scenarios, one of which has AT&T swapping its 33% interest in Cablevision to Time Warner in exchange for a portion of TWE’s cable subscribers. “Time Warner would like to own an interest in Cablevision,” Londoner wrote in a recent report. Such an acquisition would “cluster” the area for them, he added, giving the New York-based giant a piece of Cablevision’s New York sports teams and entertainment venues such as Madison Square Garden and Radio City Music Hall.

“It’s too early to comment on a potential outcome of any discussions,” Time Warner spokesman Ed Adler said Friday.

Another scenario Londoner put forth is AT&T assuming outright ownership of 2 million of TWE’s 10.9 million subscribers in exchange for handing over its 25% interest in the partnership. Such an accounting would subtract 8.9 million subs from AT&T, putting the telco/cabler at the 30% limit. Time Warner would have to fork out some cash or other consideration if Warner Bros. and HBO were included in the transaction.

Looking to buy time for its considerable lobbying efforts, AT&T is trying to convince the FCC not to vote on the cable ownership rules at its Sept. 15 meeting. While a vote may be postponed, the feeling is growing in Washington and on Wall Street that ultimately it may not swing AT&T’s way.

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