Debt reckoning for AOL TW

Sales may allow co. to delay cable IPO

NEW YORK — There’s light at the end of the debt reduction tunnel for AOL Time Warner.

The congolm is set to announce deals to sell its sports teams and DVD/CD manufacturing businesses when it announces third-quarter results next Wednesday — a pair of deals that could lift a large amount of financial pressure from AOL TW. Texas car dealership mogul David McDavid is in final discussions to purchase the Atlanta Hawks basketball and Thrasher hockey teams for a price tag said to be between $350 million and $400 million. The two sides are very near a deal, though an array of legal and Atlanta public relations issues must still be resolved before a final announcement. Turner Broadcasting’s potentially far more valuable Atlanta Braves baseball franchise is still be on the market and could fetch another $300 million for the company.

Meanwhile, Canada’s Cinram and Jim Caparro, CEO of WEA, are making the final laps in pursuit of the DVD/CD manufacturing business, valued at around $1 billion. Deal, which could close by the end of the week, is seen as an overture to the proposed merger of WEA parent Warner Music Group with Bertelsmann’s BMG — itself likely to be announced within a month.

Caparro, who has secured financial backing from investment firms Apollo and Thomas H. Lee Partners, is seen as having an inside track on the deal: In addition to being head of the company, Caparro is a distrib veteran.

Exec has long been suspected of mulling bigger plans for the division, developing it into a full-service third-party distributor that all five major labels (and potentially the DVD arms) of the big studios could use to send their product out the door.

That said, Cinram has deep pockets, with nearly C$375 million ($269 million) in cash and equivalents on its books as of mid-year, and strong borrowing capacity. And the company would reap major scale benefits — it is already one of North America’s biggest CD/DVD manufacturers.

Polishing off these two deals, in addition to the $750 million cash settlement with Microsoft this past Spring, would bring to $2.1 billion the total amount of fresh cash into AOL coffers this quarter. More important, the funds might reduce the urgency on CEO Dick Parsons to launch the Time Warner Cable IPO this year in order to reduce its debt load.

Other possible asset disposals still under consideration are music publishing, and its 50% stake in Court TV. Liberty TV owns the other half of the network, and is considered an eager buyer, especially if it does not with the Vivendi Universal Entertainment auction.

To the extent that its goal is to avoid being downgraded by the credit ratings agencies, AOL TW should be in very good shape debt-wise by the end of the year, possibly as low as $20 billion compared with $26.3 billion at the end of March. “They’re actually in better leverage situation than Disney,” noted one analyst, who estimates AOL TW will hit its target debt ratio by the end of the year without the cable flotation.

Also easing the pressure is the vastly improved balance sheet health of Comcast, which owns 21% of TWC and earlier this year was pushing for a quick IPO with which to extract cash to pay down its own debt. Thanks to the recent sale of QVC for $7.9 billion, the IPO is no longer considered essential in the near term.

Some analysts contend AOL TW would have trouble mounting the cable IPO while the SEC investigations into AOL accounting continues, so a delay until its resolution may be essential.

AOL TW, which has been in Wall Street’s good graces for the past few months, is nonetheless bracing for the company to report only marginal second-quarter revenue growth of 3% to around $10.5 million with flat profits due to continued evaporation of music sales and subscriber losses at the online division.

Fortunately, Time Warner Cable and the TV group continue to deliver strong growth. “Matrix 2” returns are also expected to pad the bottom line, though offset somewhat by hefty “Terminator 3: The Rise of the Machines” marketing expenses in the same quarter. The outlook for the third quarter, however, is expected to be healthier.

Separately, WEA said it has tapped Gillian Kellie to be chief financial officer of WEA Corp., the distribution giant’s U.S. arm, reporting jointly to WMG exec VP/financial chief Helen Murphy and WEA president John Esposito.

Kellie signed on at Warner Music in 2000, as chief financial officer of London-Sire Records, and later moved up to veepee of finance for special projects at WMG. Prior to that, she spent five years as VP of finance and administration for London Records and, concurrently, as chief financial officer of Slash Records.

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