Time Warner to untie knot with AOL

By Elizabeth Strott

Less than a decade after the biggest merger ever, Time Warner (TWX, news, msgs) is ready to spin off AOL.

"We believe AOL will then have a better opportunity to achieve its full potential as a leading independent Internet company. A separation will be the best outcome for both Time Warner and AOL," Chief Executive Officer Jeffrey Bewkes said in a statement. "The separation will also provide both companies with greater operational and strategic flexibility."

No big surprise

"It's about time," Argus Research analyst Joe Bonner said. "They were never really able to fit," he said, noting that analysts on Wall Street have been advocating a split for years.

The move isn't a surprise, as Bewkes has been telegraphing it for months and has been working to shed the company of what he believes to be non-core assets. Time Warner spun off Time Warner Cable (TWC, news, msgs) earlier this year.

In March, Time Warner named Tim Armstrong, a former Google (GOOG, news, msgs) advertising executive, as chief executive of AOL and indicated that the appointment portended a separation of the company.

Time Warner said it will purchase Google's 5% stake in AOL in order to move ahead with the spinoff. Google bought the stake in 2005 for $1 billion as part of a search-engine advertising deal.

Time Warner's 95% stake in AOL is worth about $6.26 billion, or $5.22 per share, according to Miller Tabak analyst David Joyce. That includes about $3.4 billion for AOL's advertising business and $2.8 billion for the access division. But Joyce said Time Warner shares imply that AOL is valued at only $2.84 per share in the current market. And the "5% stake owned by Google is possibly worth $330 million, far below the $1 billion they paid for it," Joyce wrote in a note to clients.

The deal "makes both parties more flexible," Collins Stewart analyst Thomas Eagan said.

'Merger of the century'

AOL and Time Warner merged in 2001, in a deal valued at $164 billion.

The company posted a record loss the following year, and in the two years after the merger Time Warner absorbed nearly $100 billion in charges to account for the rapidly diminishing value of the combined company.

In 2003, AOL was removed from the company's name, as the Internet bubble burst and AOL's dial-up business suffered. The business peaked in 2002 at 26.7 million subscribers, before wireless and high-speed rivals took over the game; AOL had just 6.3 million dial-up subscribers at the end of the last quarter, a 76% decline from that peak.

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By January 2005, Steve Case, who had sealed the deal with Time Warner's Gerry Levin and became the CEO of the joined company, had serious regrets. "In retrospect, I probably wasn't the right guy to be the chairman of a company with 90,000 employees," Case said at an event in Mountain View, Calif. "In retrospect, none of us were the right guys."

Later that year, Case proposed dividing the media giant, saying that "it's now my view that it would be best to 'undo' the merger by splitting Time Warner into several independent companies and allowing AOL to set off on its own path."

Can AOL survive?

AOL is still the fourth-highest-trafficked Web property in the U.S., behind Google, Yahoo (YHOO, news, msgs) and Microsoft (MSFT, news, msgs), with more than 104 million unique visitors in March, according to Web ratings service ComScore. (Microsoft is the publisher of MSN Money.)

But ad revenue was down 18% in the fourth quarter of last year and slumped 20% in the first quarter of 2009.

"They built their business on access, and that's disappeared," but AOL has some good, valuable assets, Argus Research's Bonner said, noting in particular its content business.

"At the end of the day, they weren't getting the kind of price that they wanted for AOL -- for any of it," Collins Stewart's Eagan said, referring to Time Warner's attempts to sell AOL in recent months.

Bonner agreed. "It's possible that (AOL) could get picked up by another company," but he was skeptical. "If that was going to happen, it might have happened already."