AOL Up For Sale?

Inplace #2

Time Warner May End Reign as Largest Media Company 

Jeffrey Bewkes, who takes over as chief executive officer of Time Warner Inc. next week, may be measured by how quickly he can dismantle the world’s largest media company.

Bewkes may spin off the cable-television division and sell the AOL Web and Time Inc. magazine units, said Gamco Investors Inc. fund manager Chris Marangi and National City Bank analyst Daniel Poole. The remaining company, anchored by the film studio and cable-TV networks, would resemble Viacom Inc. — and accordingly command higher multiples, Marangi said.

Sumner Redstone’s Viacom, owner of Paramount Pictures and MTV Networks, trades for nine times projected 2008 earnings before interest, taxes and non-cash expenses, Marangi said in an interview. New York-based Time Warner, whose assets include Warner Bros., CNN and HBO, trades at seven.

“There’s nothing special necessarily about being the biggest,” Marangi said. Gamco, based in Rye, New York, has $30 billion in assets, including 11.3 million Time Warner shares. “It’s more important to be nimble.”

Bewkes, 55, inherits a company created in 2001 with America Online Inc.’s $124 billion takeover of Time Warner Inc., billed as the ultimate in media convergence. Plans to sell everything from TV shows to magazines through the AOL network ended in record losses and the exits of CEO Gerald Levin and Chairman Stephen Case. While outgoing CEO Richard Parsons returned Time Warner to profitability, he failed to reignite the stock.

Stock Stalls

“The company is much better off today, but the stock hasn’t gone anywhere,” said Poole, who works at National City Bank’s private client group in Cleveland, Ohio. National City owns 2.29 million Time Warner shares among $31 billion in assets. “It’s been very frustrating.”

Keith Cocozza, a spokesman for Time Warner, declined to comment other than to say no future plans have been announced for the company or its businesses.

Time Warner’s 23 percent drop this year puts it among the 10 biggest losers in the S&P 100 Index of large U.S. companies. It fell 23 cents, or 1.4 percent, to $16.67 at 4:03 p.m. in New York Stock Exchange composite trading. New York-based Viacom, up 6.3 percent this year, fell $1.19 to $43.60.

Where Parsons fended off pressure from billionaire Carl Icahn to unravel the company by selling a 16 percent stake in Time Warner Cable this year and buying back more shares, Bewkes may end up revisiting the idea.

“We will be looking at anything that improves our strategic advantage,” Bewkes said on a Nov. 7 conference call. “That’ll be true for acquisitions and divestitures.”

First Priority

His first priority is AOL, investors said. Its sale may fetch as much as $18 billion, Marangi said. Shedding just the access portion could fetch at least $2 billion, said Jordan Posner, a fund manager at Matrix Asset Advisors in New York.

Bewkes, Time Warner’s president and operating chief since 2006, was the architect of a strategy to offer AOL e-mail and search services free to consumers in order to boost advertising.

The plan hasn’t attracted enough ads to make up for subscriber losses. AOL’s ad growth in the last three months of the year will slow from the third quarter’s 13 percent increase and face “continued downward pressure,” Time Warner said in November. Google Inc.’s third-quarter ad sales jumped 57 percent.

Benefits Not Realized

“Some of the supposed benefits of size, the synergies across the different businesses, have not been realized,” said Posner, who helps manage almost 3 million Time Warner shares among $1.8 billion in assets. He values them at $23 to $26.

Parsons on Sept. 18 reiterated the company’s strategy to refocus AOL on ads. Time Warner may at some point spin off Time Warner Cable, he said.

The 84 percent-owned cable unit, Time Warner’s fastest- growing business for 14 straight quarters, was overtaken by the film studio in the most recent period.

Bewkes will likely spin off the cable unit because its high debt levels and capital spending require a separate balance sheet, Poole said. The split might occur in the second half of 2008, while Time Inc. could be sold in a leveraged buyout when debt markets improve, Marangi said.

Bewkes made Tony Soprano a household name when he ran HBO. He may ultimately preside over a Time Warner that’s half its current size with about $21 billion in sales, made up of its film businesses, including New Line Cinema, and TV networks, which include TBS in addition to CNN and HBO.

Higher profit from networks and film would place Time Warner in the realm of Viacom, which was split in 2006 from slower- growing CBS Corp., Marangi said. “Networks and film benefit from things that have hurt cable — the emergence of AT&T and Verizon and the spread of digital distribution.”

A simplified Time Warner may be able to bypass weak cable valuations and struggles at AOL by concentrating on the two remaining business units, Poole said.

“You have to make sure your two businesses are rocking,” Poole said. “People are used to the stock going nowhere. Hopefully, it won’t go nowhere.”

Compliments of Bloomberg