Time Warner, the world's largest media company, agreed to pay $2.4 billion to end a shareholder lawsuit stemming from its 2001 merger with...

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Time Warner, the world’s largest media company, agreed to pay $2.4 billion to end a shareholder lawsuit stemming from its 2001 merger with America Online (AOL). Settlement costs drove the company to its first loss in almost three years.

Time Warner set aside $3 billion to pay for all AOL claims, resulting in a second-quarter net loss of $321 million, or 7 cents a share. Sales fell 1.1 percent to $10.7 billion as film revenue declined and AOL lost customers, the company said in a statement yesterday.

Closing the case ends most of the litigation brought after AOL bought Time Warner for $124 billion in 2001. The stock plunged after the deal as growth slumped, prompting shareholder suits that claimed AOL inflated sales to help close the transaction. Profit in the quarter missed analysts’ estimates and Chief Executive Richard Parsons said earnings will rise in the second half.

The company also announced a $5 billion share buyback, its first since 2001. Shares of Time Warner, which have lost more than two-thirds of their value since 2001, fell 15 cents to $17.27 yesterday. Walt Disney Co., the No. 2 media company, has fallen 7.3 percent this year and Viacom has dropped 9 percent.

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Time Warner will pay the $2.4 billion into a fund for plaintiffs who claimed AOL improperly recorded advertising revenue. The company will reserve an additional $600 million to cover other suits. Time Warner already agreed to pay $510 million to settle U.S. government investigations into AOL’s accounting.

The settlement marks “substantial progress in closing this chapter,” Parsons, 57, said yesterday in a conference call. “It’s an important step for our company.”

Before the payment, Time Warner had a profit of 18 cents a share, missing the 19-cent average estimate of 22 analysts surveyed by Thomson Financial. Analysts had estimated sales would rise 1 percent. The results were helped by a $925 million gain on the sale of the company’s remaining shares in Google, the No. 1 Web search engine, which first sold shares to the public a year ago.

Parsons last quarter struggled to boost the cable and publishing units, owners of the HBO network and Sports Illustrated magazine, enough to overcome a slump in revenue from films and at AOL. Time Warner’s movies didn’t match the 2004 success of “Lord of the Rings” videos and “Harry Potter” in theaters and AOL lost 917,000 U.S. customers.

Time Warner had a profit of $777 million, or 17 cents, a year earlier.

Time Warner’s results were worse than Anthony Noto, an analyst at Goldman Sachs, had predicted. “AOL trends are deteriorating faster than expected,” Noto, who is based in New York and rates the stock “in-line,” wrote in a note to clients.

Sales fell 4 percent to $2.1 billion at the online unit as a decline in subscriptions outweighed rising Web advertising revenue. AOL ended the period with 20.8 million U.S. customers.