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AOL eyes AT&T cable merger ; Country's No. 1 operator would buy stake in No. 2

Posted on: Friday, 1 August 2003, 06:00 CDT

NEW YORK--AOL Time Warner Inc. has reportedly offered to merge AT&T Corp.'s cable service into its own, a newspaper reported Sunday. In a story on its Web site, The Wall Street Journal, citing unnamed "people familiar with the situation," said AOL has proposed merging AT&T Broadband with its Time Warner Entertainment unit. The move would give the AT&T division, the nation's largest cable system, access to AOL's programming, broadcasting and transmission facilities.

The Journal reported that AOL proposes buying a 40 percent stake in the unit, leaving AT&T with a majority. Time Warner Cable is the country's second largest cable operator. AT&T is the nation's No. 1 cable operator, with more than 13 million subscribers. In July, AOL and AT&T began talks about a merger shortly after AT&T rejected a $41 billion unsolicited stock swap offer made by Philadelphia-based Comcast Corp., which has more than 8.5 million cable subscribers. A combination of the cable operations of AOL and AT&T would create a cable giant with 28.9 million subscribers, likely facing heavy scrutiny by federal regulators and politicians concerned about an entity that would control about 40 percent of the market by some estimates.

"The fundamental argument is 'Do you want one cable operator with that type of dominance?"' David Farber, a telecommunications professor at University of Pennsylvania and the Federal Communication Commission's former chief technologist, told the Associated Press in July.

Another possible outcome is for the broadband unit to be bought by a smaller cable outfit. But none have the financial wherewithal to cut such a deal, and would need a partner, analysts say. Cable companies such as Cablevision Systems Corp., Cox Communications Inc. or Charter Communications could seek out a much larger firm with deep pockets--such as The Walt Disney Co., Microsoft Corp. or Viacom Inc.--to join in a purchase in return for an equity stake in the combined company.

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