AOL Time Warner sees charge up to $60 bn

Reshma Kapadia

NEW YORK: AOL Time Warner Inc. said on Monday that it would take an

accounting charge of up to $60 billion, likely the largest corporate charge on

record, and the world's largest media and Internet company reined in forecasts

of earnings growth for 2001 and 2002, citing the weak economy.

In its first conference call since naming a successor to chief executive

Gerald Levin, AOL Time Warner said that it was not counting on an economic

recovery or growth in the hard-hit advertising market this year.

"We all learned a lesson in the current economic environment,"

Richard Parsons, co-chief operating officer, told Reuters. "The economy

backed up on us much more quickly and more steeply than anyone anticipated and

then you find yourself at the wrong end of overly aggressive guidance and you

get punished big time. I think realism tempered by prudence is the way to go.

Parsons, who will succeed Levin in May, repeatedly told investors the company

was going to take a conservative stance so it could deliver rather than

overpromise -- a marked contrast to the bold growth targets the company laid out

a year-ago and stood by amid the ad slowdown before finally abandoning in

September.

AOL Time Warner said growth in cash flow for 2002, a key measure of

performance for media companies, could drop into the high single digits in a

range of eight per cent to 12 per cent from previous expectations of

double-digit growth. The company said it expected revenue growth of five per

cent to eight per cent.

The Internet and media giant also confirmed it would buy Bertelsmann AG's 49

per cent interest in money-losing AOL Europe for $6.75 billion in cash. The

venture, which saw about $800 million in revenues in 2001, is seen as a key

vehicle for the company's much-talked about global expansion.

Charge of up to $60 billion



While its revaluation under new accounting rules has not been completed, AOL
said it expected to post a one-time, noncash charge of $40 billion to $60

billion for the first quarter of 2002, reflecting overall market declines since

its merger was announced in January 2000.

The merger of AOL and Time Warner was originally valued at about $181

billion, but fell to about $106 billion by the time the deal closed in January

of 2001. The charge was an indication of the overvaluations during the dot-com

boom.

"All companies that have goodwill and have gone through large business

combinations will be more significantly affected than others," Chief

Executive Wayne Pace told Reuters. "The amount of the charge can roughly be

tied back to the change in the stock price from January 2000 to January 2001

when we closed the deal,"

The charge of up to $60 billion stands to be one of the largest on record and

would be greater than the 1999 gross national income of countries such as Peru,

New Zealand, and Hungary, according to the World Bank.

Fiber optic components maker JDS Uniphase Corp. slashed the value of goodwill

on its books by some $38 billion to adjust a drop in the value of 10

acquisitions last July.

Aim low, please Wall Street



"The last thing management wants to do is set financial targets that are
unreachable," said Jordan Rohan, analyst at SoundView Technologies.

"These targets are pretty low. If anything goes right for AOL, such as an

ad recovery, they could be seeing a 20 to 30 percent increase in its share

price."

Wall Street analysts had already been cutting their estimates for AOL Time

Warner's earnings in recent weeks amid expectations the company would tame

forecasts after falling short of its aggressive 2001 targets last year.

The company also said an economic upturn in 2002 could lead to EBITDA growth

in the low-to-high teens in 2003 and beyond and said AOL Time Warner was

positioned to outperform rivals and to continue growth once the recovery

occurred.

"It was positive in that the targets leave room for some upside if the

economy turns," said Thomas Weisel analyst Gordon Hodge of the conference

call. "The comforting thing was to hear they are budgeting for no change in

the economic environment."

For the full year 2001, AOL Time Warner said it expects to post EBITDA growth

of about 18 percent to just under $10 billion, falling shy of its revised

guidance in September of about 20 percent growth.

Revenues for 2001 are expected to grow about five per cent to just over $38

billion. Free cash flow for 2001 will increase by more than 200 percent to about

$3 billion.

The company said fourth-quarter EBITDA is expected to grow by about 14

percent to over $2.7 billion and that revenues will grow some three per cent to

$10.5 billion, hurt by advertising.

The 2001 results exclude certain one-time nonrecurring charges expected in

the fourth quarter, including about $50 million of merger-related costs and

about $1.5 billion to $1.8 billion of noncash charges primarily related to the

revaluation of certain equity investments, such as Time Warner Telecom, and

market declines in the company's portfolio.

The pain from the ad slump is not quite over and the AOL Internet unit would

likely feel the full impact in 2002, chief operating Bob Pittman said. However,

he told investors and analysts to stop worrying about Internet subscriber

growth, noting that only a bit more than half of the about 95 million homes

expected online were already on.

Plugging along



Parsons said he does not aim to diverge from the vision that created the
company. Making investments necessary to drive new services such as high-speed

Internet access and digital music would remain a high priority, as well as

building infrastructure for services abroad.

"The company is clearly looking outside the United States to expand its

footprint and influence all of its businesses because that is where all the

growth is," Parsons told Reuters. The company would also remain diligent on

cost management.

"We'll watch our waist line, but won't cut muscle," Pace told

Reuters. "We don't intend to do anything significant in terms of

restructuring or headcount reductions or layoffs. We don't have anything of that

sort in mind, but we will pay attention to costs and if certain businesses or

brands aren't performing, we will take a hard look at them.

In the last year, the company has cut a slew of jobs at CNN, its publishing

units and at AOL. Meanwhile, Bertelsmann will transfer 80 percent of its current

stake in AOL Europe to AOL Time Warner on Jan. 31 for $5.3 billion in cash. AOL

Time Warner will buy the remaining 20 per cent for $1.45 billion on cash in July

2002.

The European Internet venture, which has about $800 million in revenue and

$600 million in losses in 2001, is largely seen as the company's vehicle into

its much-talked about global expansion. Pace said the company hopes to cut AOL

Europe's losses in half this year and generate revenue of up to about $1

billion.

(C) Reuters Limited.