NEW YORK (Bloomberg) — Time Warner Inc., which is being acquired by America Online Inc., agreed to buy the rest of Road Runner, a closely held provider of Internet service over cable-television lines.
The No. 2 U.S. cable company isn't disclosing how much it's paying Compaq Computer Corp. and Microsoft Corp. for their 10 percent stakes, spokesman Mike Luftman said. Time Warner and the Newhouse family's closely held Advance Publications Inc. together own 55 percent of Herndon, Virginia-based Road Runner.
Time Warner said in a statement that it will have expenses of $570 million for the purchase. The New York-based company expects to take a fourth-quarter charge of $20 million to $40 million for buying some of Road Runner's assets.
Time Warner also said fourth-quarter earnings will be less than expected, becoming the latest company to say slowing advertising sales will cut growth. This year's cash flow, excluding depreciation, is expected to increase 11 percent, less than the expected 12 percent to 13 percent. Time Warner blamed slowing cable ad sales, weaker-than-expected music sales and the "disappointing" performance of its "Little Nicky" film.
Time Warner shares, which had risen 10 percent in the past year, fell $4.50 to $68.22 in midmorning trading. America Online shares, which had fallen 42 percent, dropped $3.41 to $45.55.
America Online, the largest Internet service provider, agreed in January to buy Time Warner for $178 billion. The value of the transaction has fallen by about 30 percent to $124 billion as America Online's stock price fell. Some investors have said the combined company could have a tough time meeting sales and cash-flow forecasts as ad sales slow.
Time Warner uses earnings before interest, taxes and amortization, or cash flow excluding depreciation, as one measure of its quarterly performance.
Ad sales will be one of the main sources of revenue for the new company, and they're growing more slowly or even declining at many big media and Internet businesses as failing Web sites cut spending and the economy cools. Other media companies including Dow Jones & Co., News Corp. and Liberty Media Corp. have said advertising growth is likely to be sluggish in 2001.
America Online said in a statement that it expects fourth-quarter ad revenue to be in line with analyst estimates.
Road Runner sells Internet service over cable lines that is as much as 100 times faster than dial-up Internet access using phone modems.
AT&T Corp., the No. 1 U.S. cable company, got part of its stake when it purchased cable company MediaOne Group Inc. for $44 billion in June, and was ordered by regulators to sell it because AT&T controls a rival Internet provider.
AT&T will returns its 25 percent stake to Road Runner in exchange for some network assets and AT&T subscribers that use the service, said AT&T Broadband spokesman Steve Lang. AT&T isn't disclosing how many Road Runner subscribers it has, he said.
Advance Publications isn't reducing its investment, said Time Warner spokesman Ed Adler.
America Online is based in Dulles, Virginia. Compaq is based in Houston, and Microsoft is in Redmond, Washington.