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AOL Charge Could Reach $20 Billion

Next write-off by the media giant would come as firm readies for initial public offering of cable assets and follow its record $54-billion charge last year.

January 09, 2003|Sallie Hofmeister | Times Staff Writer

AOL Time Warner Inc.'s next charge to earnings probably will fall between $10 billion and $20 billion, according to an analyst who has closely covered the media giant's woes.

The company said last fall that it would take a "substantial" noncash charge to reflect the changing value of its cable systems and Internet assets. AOL is expected to announce the write-off of "goodwill" in reporting its fourth-quarter and year-end results this month.

In estimating the charge, UBS Warburg analyst Christopher Dixon said the exact amount will depend on how aggressive AOL wants to be in "cleaning its slate" to prepare for an initial public offering of its cable properties. Such a spinoff would help AOL reduce debt.

The company is carrying $10.4 billion of goodwill in its cable unit, the nation's second largest. In addition, it has $36 billion of goodwill on the books of its America Online division.

Goodwill is the difference between what a company pays for a business and the value of its tangible assets.

In speculating about the size of the write-off -- which would follow a record $54-billion charge last year -- analysts have pointed out that such moves can have serious implications if they impair shareholders' equity too severely.

Heavy reductions can trigger debt provisions that raise borrowing costs or otherwise impair financial flexibility.

AOL is expected to write off only a fraction of its remaining cable and Internet goodwill to avoid a downgrade of its debt rating.

A number of corporations have had to take such noncash charges under new accounting rules that require periodic review of goodwill on their books.

Though an embarrassing reminder of the drop in the value of acquisitions, such charges don't affect a company's cash position.

AOL has been forced to take unusually large charges, mainly because of a rapid decline in the value of its Internet operations. The company was formed three years ago in a merger between Time Warner Inc., the world's largest entertainment company, and America Online, the largest Internet service provider.

The highflying dot-com industry imploded just as the merger completed. AOL stock plunged, and the two firms experienced difficulty in marrying their diverse cultures.

AOL shares Wednesday fell 28 cents to $13.88 on the New York Stock Exchange.

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