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SEC Might Snag AOL Cable IPO

4/06/2003 8:00 PM Eastern

The expected initial public offering of AOL Time Warner Inc.'s cable assets seemed to be in jeopardy, after the company disclosed in a securities filing last week that it might have to restate as much as $400 million in revenue stemming from an earlier advertising agreement with Bertelsmann AG.

AOL Time Warner had expected to attempt the IPO for its Time Warner Cable unit this summer. But with another Securities and Exchange Commission investigation hanging over the parent company, some industry observers said a cable IPO may have to be postponed.

According to AOL Time Warner's 10-K annual report, filed last Monday, the SEC is looking into a transaction through which Bertelsmann purchased about $400 million in advertising from the AOL online unit. That transaction took place at the same time AOL paid the German media giant $6.7 billion for Bertelsmann's interest in AOL Europe.

According to the document, the SEC contends that at least some of that $400 million payment should have been accounted for as a reduction in the purchase price, rather than as revenue.

In the filing, AOL said that it and its auditors believe the transactions had been correctly accounted for, and that it would continue to cooperate with the SEC.

Columbia Law School professor John C. Coffee Jr. said that although he did not want to speak for the SEC, it is highly possible that the federal agency could block the Time Warner Cable IPO.

According to Coffee, companies must first file registration statements with the SEC for an IPO, and those registration statements must be declared effective by the agency's corporation finance division.

If the SEC's enforcement division believes that adequate disclosure has not been made by a company that is under investigation — like AOL Time Warner — corporation finance most likely would not declare a registration statement from that particular company effective, he said.

"It wouldn't be the first time," Coffee said.

Tough sell, anyway

One saving grace for the Time Warner Cable IPO could be the argument that the cable division itself is not being investigated. But even then, Coffee said, getting an "effective" ruling is a long shot.

"That would be an argument that you could make," Coffee said. "On the other hand, the enforcement division doesn't usually want to give up leverage, and it's one more way to force a settlement."

AOL Time Warner has the right to appeal, he added, "but don't count on it."

Some securities analysts said they expected a delay to the IPO not because of the investigation, but because of the expected poor performance of AOL Time Warner as a whole.

In its fourth-quarter conference call with analysts, AOL Time Warner CEO Richard Parsons said growth in the cable division would be in the high single-digits to low double-digits in 2003, "which is slower than cable's recent history."

That, said several analysts, was an indication that the IPO would be delayed.

Parsons himself even alluded to a delay in the offering, stating that the company was on track to initiate the offering at some time in the summer. Earlier, AOL Time Warner said it hoped to start the IPO in the second quarter, which most analysts took to mean in the spring.

In the most recent 10-K filing, AOL Time Warner said it "expects to complete an initial public offering of TWC Inc. common stock during 2003."

"That's a real shift from Parsons's last comments," Sanford Bernstein & Co. media analyst Tom Wolzien said. "There certainly is slippage there. Does that imply that the SEC issues spill over, or are they just being safe in terms of timing? I don't know."

Guess: Fall at best

But one analyst who asked not to be named said that he expected AOL Time Warner to hold off until the fall for the IPO.

"When they put out their fourth-quarter numbers and guidance for 2003, it was not that good," said the analyst. "They said the first quarter would be pretty bad. You want at least a couple of good quarters behind you before you do the IPO."

Waiting for two good quarters would push the IPO into the fall, the analyst said.

A timely Time Warner Cable IPO may also have implications for Comcast Corp., which recently completed its deal to restructure the Time Warner Entertainment LP partnership with AOL Time Warner. In return for its 27.6 percent interest in TWE, Comcast received $2.1 billion in cash, $1.5 billion in AOL Time Warner stock and a 21 percent interest in the TWC cable business.

Time Warner Cable financed the cash portion of the deal with a short-term note, which it expected to repay through the proceeds of the IPO.

Though Time Warner Cable is likely to easily be able to convert that short-term note to long-term debt, with AOL Time Warner on a massive debt-reduction binge, that is probably something the company would like to avoid.

September