AT&T buy helps TW revamp accounting

Company to consolidate WB, HBO, cable earnings

NEW YORK — AT&T’s acquisition of MediaOne Group is expected to let Time Warner consolidate earnings of Warner Bros., HBO and all its cable systems for the first time in several years, TW revealed in an SEC filing late last week.

Such a streamlining of Time Warner’s accounting would be good news for investors, who have struggled for the past few years with the conglom’s extremely complex accounts.

The changes flow from the impact of the MediaOne acquisition on that cabler’s management rights in the Time Warner Entertainment partnership, which owns the studio, HBO and many TW-managed cable systems. The partnership, originally formed in 1991, is 74.5% owned by Time Warner and 25.5% owned by MediaOne.

Time Warner has previously said that any change in control of MediaOne automatically results in loss of MediaOne’s management rights over the cable systems in the partnership.

But it revealed in an SEC filing last Thursday that the loss of these management rights would be “expected to trigger other changes affecting TWE, including Time Warner’s consolidation of TWE’s operating results and financial position for accounting purposes.”

While Time Warner owns a majority of the partnership, it does not consolidate the partnership’s businesses because MediaOne has management rights over some of its businesses, TW said in the same filing.

As a result, Time Warner reports two sets of accounts: one of its fully owned businesses and one for TWE. In its annual report for last year, for instance, TW reported revenues of $14.5 billion even though its total revenues including TWE businesses was almost $27 billion.

Confusing balance sheet

TW’s balance sheet also gives a confusing picture, showing debt of $10.9 billion at year end. TWE has another $6.3 billion in debt, so the company’s total debt is about $17 billion.

Wall Street observers had not expected TW to be able to consolidate TWE unless Time Warner collapsed the partnership by buying MediaOne out. While such a restructuring may have been prompted by the AT&T acquisition of MediaOne, it was not a certainty.

But TW’s disclosure in the filing means the company could consolidate TWE without a restructuring. People close to Time Warner said Friday the company would strongly prefer to be able to consolidate TWE, making the full financial position of the company clear. A TW spokesman said the filing “speaks for itself.”

Lehman Bros. analyst Larry Petrella said the disclosure was significant because Time Warner’s complex structure has “always been a point of confusion and this will make it easier for investors and analysts to look at the company.”