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Time Warner Moves Closer To AOL Split

Just weeks after finalizing the spin-off of its interest in Time Warner Cable, Time Warner Inc. began setting the wheels in motion for at least a partial spin of its troubled online unit, AOL.
According to documents filed with the Securities and Exchange Commission Monday, Time Warner is asking bondholders to vote on an exchange of $12.3 billion in debt guarantees to Time Warner's Home Box Office unit, a move that would unlock restrictions on transferring the assets of AOL.

According to the documents, Home Box Officer would guarantee about $12.3 billion in bonds, and would pay back the debt in full in compliance with the original terms. Home Box Office, according to the documents, reported $3.7 billion in total revenue in 2008 and has about $11.1 billion in assets.

In a related move, Time Warner also is soliciting consents from bondholders to amend the indentures governing the $12.3 billion in bonds, offering to pay holders $5 for every $1,000 in principal amount they hold. That incentive -- the debt would remain on the books and bondholders would still be paid in full over the course of their obligations -- would work out to be about $61.5 million in cash.
With the two transactions Time Warner is essentially moving the debt off of AOL's books and backing it up with HBO's assets.
Time Warner has struggled for years to get the AOL unit back on track, switching to an advertising model from a subscription model in 2006. In August, chairman and CEO Jeffrey Bewkes proposed splitting out the dial-up access business, a move that he said could be completed in early 2009.
In mid-March AOL hired former Google senior vice president Tim Armstrong to head up the struggling unit, which fueled speculation that some sort of deal was in the works.
In the filings, Time Warner said it is currently exploring its strategic options for AOL, including spinning off the Access and Web Services businesses to Time Warner, acquisitions of interests in related businesses, joint ventures, or separating out the units in a single or separate division. While the company hasn't made a decision yet, the filing stated that Time Warner is currently leaning toward a spin-off of one or more parts of the businesses to its stockholders.
Time Warner said that in the absence of more favorable strategic opportunities, it anticipates that it "would initiate a process to spin off one or more parts of the businesses of AOL LLC to Time Warner's stockholders, in one or a series of transactions," the filing stated.
And though it expects that it could initiate those transactions without the bondholder consent or the guarantee, receiving them would "simplify the execution of the strategic options available to Time Warner," according to the filing.