AOL Time Warner will buy AT&T’s stake in Time Warner Entertainment.

US media giant AOL Time Warner has agreed to buy AT&T’s 27.6% stake in Time Warner Entertainment, which owns the Warner Bros studio, the HBO TV channel and most of AOL TW’s cable assets.

AOL TW will pay $3.6 billion in cash and stock, and will give AT&T a 21% stake in its new cable unit, Time Warner Cable. Comcast, which is buying AT&T’s cable assets, will allow AOL to offer ISP customers broadband Internet access via its cable network.

For AT&T and Comcast, the deal means cash and little else; Comcast will have to hold its rival’s shares in trust. AOL TW increases its debt, until a planned listing of the cable group, but may gain the chance to justify its existence.

While the biggest benefit of the AOL/Time Warner merger so far has been cross-promotion, there are greater potential synergies in cable. TWC has 13 million subscribers, and cable is the best medium for interactive TV and domestic broadband. However, few of AOL’s 26.5 million US subscribers currently have broadband access – particularly among non-TWC cable subscribers.

While broadband services from rival ISPs are available from a variety of cable providers, AOL has only been available from TWC. The Comcast deal gives nine million extra homes the option of using AOL, with another nine potentially following. This should help the ISP increase broadband users significantly.

The formation of TWC is still more significant. This deal gets rid of many structural problems that have dogged AOL TW – and an IPO planned for 2003 would allow TWC to make acquisitions without increasing its parent’s debt or depressing its share price.

As long as AOL TW can keep the unit aligned to the group’s strategy (and with Comcast unable to vote but unlikely to sell in the short term, this should be easier) it should be able to use TWC’s expansion to boost the ISP’s subscriber base and upsell media content. If AOL TW can make a success of this restructuring, its critics may quiet down.

Related research: Datamonitor, AOL Time Warner (BFTC0732)

You can download a FREE technology report from www.dmfreereports.com