Entertainment Notebook: An Important Link for AT&T and Time Warner

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AT&T

(T) - Get Report

and

Time Warner

(TWX)

apparently are moving closer to an agreement for AT&T to transmit its phone service over Time Warner's cable systems. But investors who expect the deal to produce an immediate windfall for Time Warner may be disappointed.

Time Warner, the world's largest media company, and phone giant AT&T have been haggling for months over the details of the deal, a crucial part of AT&T's effort to sell local telephone service through cable lines. AT&T bet on that strategy in a very big way when it agreed to spend more than $30 billion for cable operator

TCI

(TCOMA)

in June. But unless it can sign up Time Warner, which by some measures is the nation's largest cable operator, AT&T will remain far from its goal of building a single national brand of local phone service.

That fact has led some investors to expect that the deal will result in a huge payday for Time Warner. As rumors of the deal heated up last week, sparked by a report from

David Faber

of

CNBC

, Time Warner's stock hit an all-time high of 111. A deal would be "nothing but good news" for Time Warner, says

Prudential Securities

analyst Kathy Styponias. (She rates Time Warner accumulate; Time Warner has had no recent stock offerings.)

Merrill Lynch

analyst Jessica Reif bets AT&T will eventually reach an agreement with Time Warner and other cable operators to provide its branded phone service over cable systems nationwide, and she views a deal as a potential positive for Time Warner. But she warns investors not to expect a big upfront payment to Time Warner from AT&T. While the technology to deliver phone service over cable lines is improving, its cost is still high, and the agreement will be "structured so that there's an interest for both parties ... not a billion-dollar bonanza," says Reif, who rates Time Warner a buy.

AT&T and Time Warner declined to comment.

In trading Tuesday, Time Warner fell 11/16 to close at 108 5/16.

To Infinity ... and beyond.

CBS'

(CBS) - Get Report

$2.9 billion offering of shares in its

Infinity

(INF:NYSE) radio and billboard subsidiary went off without a hitch last week. Priced by underwriters at 20 1/2 on Wednesday evening, shares opened for trading Thursday at 24 1/8 and stayed strong all day. Whatever the merits of the deal, the success of the offering proves the

canniness of CBS CEO Mel Karmazin, who lined up 23 investment banks to support the massive IPO and make sure dissenting voices would be hard to find.

But before breaking out the champagne, Infinity investors might want to take a look at the recent performance of the other big media company stock reshuffling this fall. That was Rupert Murdoch's spinoff of a minority stake in

Fox Entertainment Group

(FOX) - Get Report

, the U.S. entertainment division of Murdoch's

News Corp.

(

(NWS) - Get Report

NWS ADR).

Like Infinity, Fox was already a part of a bigger publicly traded company. And, like Infinity, the Fox IPO was shepherded to market by a veritable convoy of big-name investment banks -- nine in total -- that convinced buyers that Fox was worth its rich valuation. And, like Infinity, Fox enjoyed a nice pop on its first day of trading, rising from its IPO price of 22 1/2 to 24 1/2 as close to 50 million shares changed hands.

But since then, even the support of the same I-banks that reaped fat fees from the Fox deal hasn't kept Fox stock from sinking. In the last week, both

J.P. Morgan

and

Bear Stearns

have initiated coverage of Fox with buy ratings. (Both companies were among the lead underwriters of the Fox deal.) And Fox stock is now trading under 20, off almost 20% from its first-day close.

Just something to keep in mind as the near-inevitable buy ratings on Infinity start to flow.