Time Warner Splitting Off AOL From Its Content/Ad Business

Aug. 4.08 | About: Time Warner (TWX)

According to the WSJ, media giant Time Warner Inc., (NYSE:TWX), as part of its plans to cut costs and streamline operations, is expected to announce on Wednesday that it has completed the internal work necessary to separate its AOL Internet-access business from its website and online advertising business.

This news shouldn’t come as a surprise. Time Warner CEO Jeff Bewkes, since he took the job eight months ago, has made clear his company’s intention to make a structural separation of AOL’s access and audiences business, so they can be run independently.

The separation of AOL, which consists principally of interactive consumer and advertising services, is being pursued under the expectations that it will significantly enhance operational focus and multiply strategic options.

Preparations for the split accelerated after Microsoft’s (NASDAQ:MSFT) bid for Yahoo Inc. (NASDAQ:YHOO), which prompted Yahoo to contemplate teaming up with AOL on a deal designed to thwart Microsoft’s bid for the Web portal. Under a possible AOL - Yahoo deal, Yahoo would acquire Time Warner’s AOL in exchange for the media giant taking a large minority stake in the combined company. However, a concrete deal has yet to be reached:

The Yahoo discussions have valued AOL at around $10 billion, excluding the dial-up business. In contrast, Time Warner’s current stock price — $14.23 — suggests a value of no more than $3 billion to $4 billion for the ad-sales and content businesses, analysts say.

AOL has long been a drag on Time Warner’s stock partly because of the decline of its Internet-access business since more customers abandon dial-up service for faster cable or fiber optic service. There is also some uncertainty about prospects for its ad-based business as well.

Once Time Warner concludes discussions about the ad-based business, notes WSJ, it will turn to the dial-up business. “The company already has had informal contact with possible buyers, including rival EarthLink Inc. It is exploring a securitization, whereby it would raise money on the back of anticipated cash flow from the business.”

AOL’s business, which has as a primary product offering of an online subscription service that includes dial-up Internet access for a monthly fee, is valued between $2-3 billion by analysts, but the media conglomerate is expected to seek considerably more than that in any sale discussion.

AOL also earns revenues through its relationship with Google Inc. (NASDAQ:GOOG), under which Google sells certain advertising that appears on the AOL Network and shares the resulting revenues with AOL.