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THE CUTTING EDGE

AOL Nears CompuServe Takeover

Telecom: H&R Block would sell embattled service to WorldCom, which would then swap CompuServe's subscribers for an AOL network service.

September 08, 1997|RAJIV CHANDRASEKARAN | WASHINGTON POST

America Online Inc. was close to reaching a deal Sunday night to take over its biggest competitor, the faltering CompuServe Inc. online service that has 2.6 million customers, sources close to the negotiations said.

Under terms of the proposed deal, CompuServe would still exist as a separate service, but would be fully operated by AOL. (Bloomberg News reported that sources said CompuServe's board had voted to approve the transaction Sunday morning.)

AOL, which has more than 9 million subscribers, would acquire the service from H&R Block Inc., which owns 80% of CompuServe, under a complex transaction involving telecommunications giant WorldCom Inc.

Under the tentative deal, WorldCom would buy CompuServe for $1.2 billion, then give AOL all the content and subscribers and $175 million in exchange for AOL's ANS network service.

WorldCom would most likely then combine ANS with its UUNet Technologies unit, thus becoming the biggest provider of services to link businesses over the Internet.

The deal would give AOL, which recently has faced its own financial challenges, much-needed cash to develop new online content and expand its base of subscribers. Whether the consumer-focused company can maintain the loyalty of CompuServe customers over the long term is unclear.

An AOL spokesman declined to comment on the matter Sunday night. Executives at CompuServe and WorldCom did not immediately return phone calls. A CompuServe spokesman, Steve Conway, would confirm only that there were talks.

CompuServe pioneered the online business in the 1980s, but in the 1990s was overtaken by AOL, which had savvier marketing and a hipper image among young users.

H&R Block has been trying for a year to sell the now troubled and unprofitable service, considering it a distraction to its core tax-preparation business.

CompuServe, of Columbus, Ohio, has virtually stopped trying to win new customers in the consumer market. Earlier this year it ended a $19.95-a-month service aimed at novice users. A plan to make CompuServe a separate stock company owned by H&R Block shareholders, which had been planned for late last year, was withdrawn after Internet stocks in general declined.

WorldCom's $1.2-billion offer amounts to about $13 a share for CompuServe, whose stock closed Friday at $13.50 a share.

The transaction would have to be approved by antitrust regulators. If approved, AOL's biggest competitor would be Microsoft Corp.'s Microsoft Network.

The deal would let WorldCom, based in Jackson, Miss., keep CompuServe's global data network. That, combined with AOL's ANS, would beef up WorldCom's data networks. WorldCom's UUNet Technologies, based in Fairfax, Va., is one of the largest Internet service providers.

ANS supplies about one-third of the network capacity for AOL's own customers. Under the deal, WorldCom would agree to provide network services to AOL for five years at "very competitive" prices, sources said.

As a first step, WorldCom's UUNet subsidiary would provide 100,000 modems for users to access AOL's service by year's end.

The proposed deal also calls for AOL and the German media company Bertelsmann to jointly operate CompuServe's European service.

That part of the deal would be juicy for AOL. The German company would pay AOL $75 million to become an equal partner in the European CompuServe venture, a source said.

AOL and Bertelsmann plan to spend $25 million each to develop the European service, the source said.

In the quarter ending July 31, CompuServe lost $4.1 million. The company lost $17.1 million in the same period a year earlier.

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