After months of speculation, Rule Breaker Portfolio holding AOL Time Warner(NYSE: AOL) has struck a deal with AT&T(NYSE: T) and Comcast(Nasdaq: CMCSA) that will divvy up Time Warner Entertainment, owner of Warner Bros., HBO, Comedy Central, Court TV, and extensive cable television assets.

As part of the pact, AOL Time Warner will transfer all of its cable television operations, including its share of Time Warner Entertainment's (TWE) cable operations, to a new subsidiary, Time Warner Cable. AT&T(NYSE: T) will trade its $5.7 billion preferred interest and 27.64% equity share of TWE for $2.1 billion in cash, $1.5 billion in AOL Time Warner stock, and a 21% share of the new Time Warner Cable.

AOL Time Warner plans for a Time Warner Cable IPO as soon after the deal closing as market conditions permit, expected in the first half of 2003. The first $2.1 billion raised from that IPO would pay down Time Warner Cable debt that will have funded the $2.1 billion cash to AT&T. It's unclear how much AOL debt will be transferred to Time Warner Cable, though it should be transparent to shareholders. AOL must consolidate financials from its majority-owned new company.

Key for AOL shareholders is this: Within two years after AT&T Broadband and Comcast complete their proposed merger, they will offer AOL Time Warner high-speed broadband Internet service to over 10 million homes, and another 9 million after that, "subject to the parties' mutual satisfaction with the arrangements." Sources have said AOL will pay AT&T Comcast $35 to $40 a subscriber for access and a share of any advertising revenue, reputedly higher than what Earthlink(Nasdaq: ELNK) pays AOL's cable operation. The unknown is whether the market will bear what AOL must charge to make a profit.

Another wrinkle? Microsoft(Nasdaq: MSFT), which made billion-dollar investments in Comcast in 1997 and AT&T in 1999, reportedly secured a condition in the AT&T-Comcast merger agreement to offer MSN Internet service on terms at least as favorable as granted to others. Somehow, wherever AOL Time Warner goes, it just keeps bumping up against the folks from Redmond.

Jubilant investors drove AOL Time Warner shares up 7.26%, AT&T's 8.86%, and Comcast's a whopping 15.26%. Are they right? Take our poll on the AOL discussion board.