October 13, 2000 Ms. Kathryn C. Brown Chief of Staff Office of Chairman Kennard Federal Communications Commission 445 Twelfth Street, S.W. 8-B201 Washington, D.C. 20554 Re: Applications of America Online, Inc. and Time Warner Inc. CS Docket No. 00-30 Dear Ms. Brown: This is in response to the ex parte notice submitted on October 4, 2000 by James W. Cicconi, General Counsel and Executive Vice President of AT&T. AT&T's letter claims that under the terms of the Time Warner Entertainment Company, L.P. ("TWE") Agreement of Limited Partnership ("TWE Agreement"), "AT&T may not unilaterally dispose of its interest in [TWE] except through a registration rights process that could not commence until approximately January 1, 2001." That claim is simply untrue. Contrary to AT&T's assertions, the TWE Agreement provides several options for a timely exit by AT&T: 1) AT&T could sell to a third party, 2) AT&T could sell to Time Warner, or 3) AT&T could cause TWE to be reconstituted as a corporation, and dispose of its stock publicly through the registration rights process. These are the exit mechanisms that AT&T agreed to when it voluntarily acquired MediaOne's interest in TWE, and no Commission action is necessary for AT&T to effectuate any of these options to achieve timely compliance with the AT&T/MediaOne Order. Pursuant to Article XI of the TWE Agreement, AT&T has the unilateral right to sell its limited partnership interest to a third party (TWE Agreement, 11.2(b)). Should AT&T choose to sell 50% or more of its interest to a third party, Time Warner is entitled to a right of first refusal (TWE Agreement, 11.3). If Time Warner declined to match the price offered by the third party within 60 days, however, the sale could proceed. Thus, to the extent that AT&T believes that Time Warner is unwilling to pay the price demanded by AT&T for its interest, AT&T is free to seek a better price from a third party, and AT&T would be entitled to receive any such better price from that third party or from Time Warner, if Time Warner elects to exercise its right of first refusal. AT&T's letter goes on to suggest that, if AT&T elects to pursue the registration rights process pursuant to Article XIII of the TWE Agreement, AT&T may be unable "to fully dispose of its 25.5% interest in TWE prior to May 19, 2001." Of course, there is no reason why a mutually agreeable sale to a third party or to Time Warner could not be completed prior to May 19, 2001. Contrary to the impression that might have been conveyed by AT&T's letter, negotiations with AT&T for such a purchase by Time Warner are ongoing and proceeding constructively. Even if AT&T elects to pursue the registration rights process, nothing in the TWE Agreement precludes AT&T from timely compliance with the divestiture obligation imposed by the Commission. The TWE Agreement provides that the next opportunity for AT&T to invoke the registration process commences on January 1, 2001. The TWE Agreement also incorporates a process whereby certain steps must be taken prior to a public registration (TWE Agreement, 13.1). However, the TWE Agreement provides that such process be completed within approximately 75 days, i.e., by on or about March 16, 2001. Thus, there is nothing in the TWE Agreement that would prevent AT&T from completing a public sale of its interest in TWE through the registration rights process prior to May 19, 2001. It is possible, of course, that completing such a public sale prior to May 19, 2001 may not be consistent with AT&T's desire to maximize its return on such a sale. However, as the Commission has recognized, at the time of their merger negotiations, AT&T and MediaOne "were on notice that they should not enter into any transaction that would be difficult for them to divest within 60 days after the stay [of the FCC cable horizontal ownership cap] was lifted, and they assumed the risk that they would be forced to divest within 60 days if and when the stay is lifted." Nevertheless, the Commission has provided AT&T with a mechanism specifically designed to deal with such a contingency. In the event AT&T is unable to complete its divestiture by May 19, 2001, it can place its interest in an irrevocable trust for orderly disposition by the trustee. Thus, assuming AT&T elects to pursue the registration rights process, there is no reason why it cannot comply with the "non-severable condition" imposed by the Commission in connection with its grant of the transfer of control of MediaOne to AT&T, and there is no reason why such divestiture would have to be conducted under "fire sale" conditions. Finally, AT&T's letter suggests that the Commission should impose "an obligation on both parties to ensure the fair and timely termination of the [TWE] partnership." In a letter dated October 5, 2000, America Online, Inc. and Time Warner Inc. explained in great detail why any reexamination of the divestiture obligation imposed on AT&T in the AT&T/ MediaOne Order would appropriately be considered in the pending AT&T/MediaOne reconsideration proceeding - not in connection with the AOL/Time Warner merger. Similarly, AOL and Time Warner have explained that there is no basis in the record, or in law or equity, for the Commission to use the AOL/Time Warner proceeding rewrite the exit mechanisms in the TWE Agreement or otherwise to influence any private negotiations between AOL Time Warner and AT&T relating to AT&T's disposition of the passive TWE interest it knowingly and willingly purchased as part of its MediaOne acquisition. A copy of our October 5 letter is attached for your convenience. We hope that the foregoing information helps to clarify the mechanics of AT&T's options with respect to disposition of its limited partnership interest in TWE. We would be pleased to provide any additional information on this matter at your request. Very truly yours, Catherine R. Nolan Vice President Law and Public Policy Attachment cc: Deborah Lathen Michelle Ellison Jim Bird ::ODMA\MHODMA\iManage;126193;3 The TWE Agreement was submitted to the FCC by Time Warner Inc. on September 6, 2000. And, of course, AT&T has alternative means to cure its cable horizontal cap violation other than exiting TWE, either by divesting its interests in entities that provide video programming to TWE or divesting sufficient other cable system interests to achieve cable cap compliance. Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne Group, Inc., Transferor, to AT&T Corp., Transferee, CS Docket No. 99-251, FCC 00-202 (rel. June 6, 2000) ("AT&T/MediaOne Order"). In the alternative, assuming AT&T delivers its registration rights demand notice on January 1, 2001, Time Warner could, by March 16, 2001, elect not to reconstitute TWE as a corporation. In such event, AT&T would have the right to put its Registerable Amount to TWE at appraised value by April 5, 2001, which in essence would require Time Warner to acquire such interest from AT&T. AT&T/MediaOne Order at 68. Id. at 71. Ms. Kathryn C. Brown October 13, 2000 Page 2