Will Time Warner get $15 billion for a split-up AOL?

04 08 2008

Will Time Warner get $15 billion for a split-up AOL?

Posted by: in Companies Competitive Strategy

Filed under: Competitive strategy, Yahoo! (YHOO), Time Warner (TWX)

The Wall Street Journal (subscription required) reports that BloggingStocks’ parent — Time Warner (NYSE: TWX) — is nearly done with the work of separating AOL’s 8.7 million subscriber dial-up business from its advertising one. And Earthlink (NASDAQ: ELNK), with 3.3 million subscribers, appears to be the logical partner — particularly if it’s willing to pay more than the $2 billion to $3 billion the Journal estimates its worth.

When AOL announced two years ago that it was going to get out of the Internet access business and focus on advertising, I wondered how it would come up with the roughly $2 billion it would lose from the plan to give away all of AOL’s content and services to subscribers who don’t use AOL for dial-up access. The plan was to replace that cash flow with advertising sales. But the most recently available comparison shows that AOL’s revenue has declined 43% from $1.981 billion in Q1 2006 to $1.128 billion in Q1 2008. A 64% drop in subscription revenues to $559 million was not offset by the 41% increase in advertising revenues to $552 million.

Still, I think the idea of combining AOL’s shrinking dial-up business unit with Earthlink could benefit Time Warner and yield some cost savings that would boost Earthlink’s cash flow.

But the bigger matter is Time Warner’s plan to sell off the rest of AOL’s business. For that, the Journal advocates that discussions are under way to sell the advertising part of AOL to Yahoo (NASDAQ: YHOO) for $10 billion, excluding the dial-up business. That sounds like a high price if the Journal’s estimate is correct that “Time Warner’s current stock price — around $14 — advocates a value [between] $3 billion [and] $4 billion for the ad-sales and content businesses.”

If Time Warner can sell the pieces of AOL for, say, $15 billion, it will be 9% of the $166 billion merger that put AOL and Time Warner together back in 2001. This could be the final chapter in what must surely be one of history’s most pricey mergers.

Peter Cohan is President of Peter S. Cohan & Associates. He also instructs management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.