Post-merger restructuring to cost AOL $1 billion

New York

AOL Time Warner Inc estimates its postmerger restructuring will cost close to $1 billion, with a big chunk of the total related to severance payments for laid-off employees, according to a Securities and Exchange Commission (SEC) filing.

Since America Online and Time Warner completed their merger in January, the company has consolidated operations, laid off workers and announced plans to sell or shut down its Warner Bros stores. The company hadn’t previously disclosed the size of its estimated restructuring costs.

In the filing, AOL said in the first quarter it had recorded a restructuring liability of $965 million on its balance sheet for costs incurred in “exiting and consolidating activities” and for termination of employees.

Most of the liability is included in goodwill and will be amortised over many years, rather than being itemized as a separate expense.

AOL wrote off $71 million of the merger-related costs in the first quarter. This portion of the costs was treated differently for accounting purposes because it related to America Online, which was the acquiring company in the merger.

Of the total restructuring costs, AOL said $565 million “related to work-force reductions and represented employee-termination benefits.” In January, the newly merged AOL Time Warner anno-unced plans to cut about 2,400 jobs.

At the time, AOL executives said the company would take a charge to reflect the costs of the job cuts
as part of accounting adjustments related to the merger.

“It’s bigger than we expected for cash-severance costs,” said Jessica Reif Cohen, analyst at Merrill Lynch & Co. In addition, AOL said the restructuring charge includes approximately $400 million largely due to “lease and contract-termination costs.”

A big part of the $400 million is costs associated with terminating leases on the nationwide chain of Warner Bros. stores. At its peak, the chain had about 150 stores although a great many have been closed in the past six months.

The company hinted in the filing that restructuring costs could end up being higher. It said the first-quarter estimate of total restructuring costs was based on management’s current plans. The plans “may be broadened to include additional restructuring initiatives as management continues to evaluate the integration of the combined companies.”

-- The Wall Street Journal