$5.4 billion penalty, if AOL kills Warner deal

Time Warner's fee would be $3.9 billion


January 15, 2000|By BLOOMBERG NEWS

NEW YORK -- America Online Inc. must pay a fee of about $5.4 billion if it backs out of its $160 billion agreement to buy Time Warner Inc., making it one of the largest breakup fees for a merger ever.

Time Warner must pay about $3.9 billion if it breaks up the transaction under certain conditions, according to an 8-K filing with the Securities and Exchange Commission.

AOL agreed Monday to buy the world's largest media company to gain access to its high-speed cable lines and content including Warner Bros. and New Line movies and magazines from Time Inc. Both companies and many institutional investors have been steadfast in their support of the transaction, even though its value has slid about 12 percent.

The fees "are incentives to keep the deal together, but market forces conceivably can still be greater than the breakup fee glue," said Harold Vogel, an independent entertainment analyst.

Either company can back out of the agreement without penalty if the transaction isn't completed by May 31, 2001, as long as the two sides have used their best efforts to complete the acquisition.

The breakup fees are in line with those that have accompanied other acquisitions, said Tom Burnett, founder of Merger Insight.

AOL stock has fallen about 13 percent since the agreement was announced amid concern that its revenue and profit growth would slow after the merger.

Under a formula set up by the companies, AOL must pay 2.75 percent of the product of the number of its common shares outstanding, including the conversion of convertible stock into common stock, and its closing share price Jan. 7.

Time Warner must pay 2.75 percent of the product of its common shares outstanding and convertible shares multiplied by the exchange ratio of 1.5 and AOL's share price Jan. 7.

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