TW, AOL Stocks Jolt Ahead

Time Warner Inc.'s battered stock reversed its downward spiral last week on news that it beat Wall Street's profit expectations. The good news also bumped up America Online Inc.'s sagging shares.

But analysts attributed the slump reversal more to arbitrageurs -- traders who typically pounce on merging companies' stocks -- than to the importance of Time Warner's numbers at this stage of the merger.

"The earnings of Time Warner are not quite an afterthought but are not the most important factor in the future of the combined company at this early state," said Burnham Securities media analyst David Leibowitz. "The numbers will be thoroughly gone over once a deal is in fact in place."

Cooling off

After the rush of enthusiasm from the announcement of the biggest corporate deal of all time faded, investors became cool to the $150 billion marriage and sent stocks of AOL and Time Warner down as much as 13.7% and 9.4%, respectively.

While there is no collar on the merger agreement -- or any other type of escape clause for either party -- analysts said that since AOL shares are being traded for Time Warner's shares, the latter's shareholders may not be inclined to vote in favor of the deal if AOL's stock falls too sharply.

"Clearly, the price of AOL is of major importance," said one analyst who asked not to be named.

No free rides

But one thing is for sure: If the deal does go through, AOL chairman Steve Case has said that Time Warner's cable facilities will be open to competing service providers. That viewpoint is at odds with AT&T Corp. chairman C. Michael Armstrong's argument that there be no "free rides" on his networks.

In a panel discussion at the World Economic Forum in Davos, Switzerland last week, Case was quoted as saying, "We're going to open (Time Warner's cable systems) up and let other people ride along them ... Time Warner's content will be available on many different Internet services, and AOL's brands will promote many different brands of content."

Time Warner's fourth quarter earnings beat Wall Street's expectations of 16 cents per share by four cents, according to First Call/Thomson Financial. The world's largest media company also reported fourth quarter EBITA of $2.45 billion, up 79% on revenues of $7.99 billion compared to EBITA of $1.37 billion on revenues of $7.27 billion for the same period of 1998.

Time Warner's cable operations posted an all-time record EBITA of $1.45 for the fourth quarter, up from $448 million on a year-over-year basis. Results included net pretax gains for the fourth quarter of $999 million in 1999 and $18 million in 1998 relating to the sale or exchange of cable television systems and investments.

Cable's growth was attributed to increases in basic cable, pay-per-view and Road Runner revenues and in advertising revenues, which climbed 26% during 1999 when compared to the previous year.

In a prepared statement, Time Warner chairman Gerald Levin said, "Our strategic combination with AOL will accelerate the digital transformation of Time Warner, creating the world's first Internet-age media and communications company."

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