NEW YORK (CNN/Money) - AOL Time Warner is buying AT&T's stake in Time Warner Entertainment, which includes HBO, Warner Brothers movie studio and cable systems, for $3.6 billion in cash and stock as well as a continued stake in the media and Internet company's cable operations.

AT&T held a 27.6 percent stake in TWE, but the pending purchase of the telecom's cable operations by Comcast Corp. prompted the negotiations to end that relationship. Under the deal announced Wednesday, AT&T will receive $2.1 billion cash and AOL stock now valued at $1.5 billion.

Shares of AOL (AOL: up $0.64 to $14.00, Research, Estimates), AT&T (T: up $0.61 to $11.79, Research, Estimates) and Comcast (CMCSK: up $1.85 to $23.02, Research, Estimates) all gained in morning trading Wednesday following the announcement of the deal.

As part of the deal, AT&T Broadband, the nation's largest cable operator, and its successor AT&T Comcast will retain a 21 percent stake in Time Warner Cable Inc., the cable operations of TWE serving about 10.8 million customers. It will hold less than a 5 percent voting stake in Time Warner Cable, however. One analyst estimated that the total value of the deal, including the cash, AOL stock and continued stake in Time Warner Cable would be about $9 billion for AT&T Comcast.

"This agreement will turn a non-strategic investment into cash that we can use to pay down debt," AT&T CEO Michael Armstrong said.

AOL intends to raise the $2.1 billion cash it will pay AT&T through an initial public offering for Time Warner Cable at some point early next year, but it will carry that debt until the new stock can be sold. The IPO had been planned for this year, but a weak market for both IPOs and cable stocks has delayed those plans.

Credit rating agency Standard & Poor's said Wednesday it is putting its long-term debt ratings for AOL on "CreditWatch" with negative implications, meaning it is considering a downgrade. The firm cited the additional $2.1 billion in debt in the deal and pending investigation of AOL accounting practices by the Securities and Exchange Commission and Justice Department as reasons for the rating action.

Besides the investigation, AOL Time Warner, owner of CNN/Money, has been struggling with historically low stock prices due to a weak advertising market, a stagnant customer base for its America Online Internet service, and a lack of promised savings from the merger that created the company in early 2001.

In a conference call with analysts Wednesday, AOL Chief Financial Officer Wayne Pace admitted that using the AOL stock as currency in a transaction at current depressed levels is not preferable, but that it was the best option for the company at this time. AOL CEO Dick Parsons said the deal has a provision that allows the company to walk away from the transaction if the stock drops a certain percentage from current levels, but he did not disclose details of that provision.

Pace said the deal should reduce AOL's earnings per share by about 4 cents due to factors such as higher interest expenses and an increase in the number of shares outstanding. The deal is expected to close in the first half of next year, subject to regulatory approval. Analysts surveyed by earnings tracker First Call expect AOL Time Warner to earn 97 cents a share next year, up from the 87 cents a share they expect it to earn in 2002.

As part of the deal, Internet service provider America Online will be able to offer high-speed Internet service to 10 million homes in the AT&T-Comcast service areas within two years of the closing, including Boston, Seattle, Indianapolis and Nashville, Tenn. An additional 9 million homes in AT&T-Comcast service areas could be made available to AOL's high-speed service after that. The terms of that three-year high-speed Internet agreement were not made public.

The Wall Street Journal reported Wednesday that AOL has agreed to pay AT&T Comcast between $35 and $40 for every high-speed Internet customer AOL signs up through the agreement. The paper said that would be one of the highest payments of its kind in the industry. It said by comparison that EarthLink Inc., the nation's No. 3 Internet service provider, pays Time Warner Cable less than $30 per customer it signs up in Time Warner's area.

Parsons said wouldn't comment on the Journal report, saying it wouldn't be beneficial to the company to disclose details of the deal regarding high-speed Internet customers while the company is engaged in negotiations with other cable providers. He said he hoped to have agreements with other providers announced in the coming months.

Parsons said the agreement on high-speed Internet service is separate from the sale of the TWE stake. He hailed both agreements as important steps in the company's recovery efforts.

"Through this restructuring, we will simplify our overall structure, while maintaining the integrity of our balance sheet," he said, adding that other options to buy back AT&T's stake in TWE, including a cash purchase or an immediate IPO, would have hurt AOL's balance sheet.

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One analyst agreed with Parsons that the deal was a good resolution for the company.

"All in all, we find the restructuring removes several overhangs on the stock, namely TWE-related complexities and lack of AOL carriage, on terms favorable to the company," First Albany Corp. analyst Youssef Squali wrote in a note to clients Wednesday. Squali reiterated a strong buy on the stock.

TWE was a major part of AOL Time Warner's current structure, producing about 40 percent of its revenue and more than half of its earnings before interest, taxes, depreciation and amortization. Warner Brothers and HBO currently are among the company's most successful units. TWE also includes interests in the WB Network as well as cable networks Comedy Central and Court TV.

Parsons said the new Time Warner Cable stock could be used as currency in acquisitions of other cable operations, although he wouldn't predict when such a deal might be done or how many cable customers the company ultimately aims to serve. He said the deal also could make it easier to sell some noncore assets, although he said there are no immediate plans to make any such sales.