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Barron's author Dimitra Defotis calls Time Warner (TWX) stunningly cheap. Here's why:

New CEO Jeffrey Bewkes is likely to separate, spin off, or sell the subscription arm of AOL - its weakest link - which will expose the strength of its digital ad platform, recently bolstered by AOL's $850M purchase of UK social-networking site Bebo. Despite its problems, AOL boasts 35% margins.

Its film division faces challenges domestically, but Bewkes hopes to boost revenue by exploring opportunities in Eastern Europe, Russia, Latin America and India - and by increasing digital distribution and making on-demand movies available earlier in the release schedule.

Warner's cable network is less sensitive to economic weakness because its sales are largely from for-fee content, and not dependent on ads. Rivals CBS (CBS) and Viacom derive 60% and 40% of their revenue from ad sales; for TWX the figure is just 26%.

Time Warner will net more than $9.25B on the Time Warner Cable (TWC) spinoff - or about $5/share. That means shares, which trade below $15, can actually be had for about $10 - or just 10x 2008 EPS - far cheaper than peers Disney (DIS) and Viacom (VIA), and than its historical average. The extra cash gives Warner the time it needs to custom-build a turnaround and focus on its core competencies.

TWX has repurchased $22.5B of its shares over the past few years, and word on the Street is it will soon spend another $3.5B to reduce its shares outstanding by 10%. Shares could be worth as much as $26 a year from now, Deutsche Bank's Doug Mitchelson says.


Sources tell Silicon Alley Insider AOL is (un)officially up for sale. Who might its suitors be? Yahoo (YHOO)? Microsoft (MSFT)?

Note that Google (GOOG) owns a 5% stake in AOL. A clause in its 2005 purchase agreement give it the right to force Time Warner to bring its Internet division to the market. At an estimated $500M loss, it seems unlikely to do so.

Source: Time Warner's Due for a Comeback - Barron's