If content is king again, then the king just decided to go it alone.
Time Warner Inc. said Thursday it would move ahead with plans to spin off AOL, ending a tumultuous association that began when AOL acquired the world’s largest media company eight years ago.
The separation is meant to allow Time Warner to “focus to an even greater degree” on its core content businesses, which include television and film production, as well as the operation of several cable TV networks, Chief Executive Jeff Bewkes said in a written statement.
AOL will operate as an independent, publicly traded company, Time Warner said.
Time Warner will acquire the 5 percent of AOL currently owned by search engine giant Google Inc. Once the separation is completed, Time Warner’s 100 percent ownership of AOL will be spun off to shareholders.
The transaction is expected to be completed by the end of 2009.
Time Warner shares rose 2.4 percent to close at $23.55.
Investors had anticipated the news, and uncertainties about the value of what shareholders will be getting in the spin-off are keeping some people on the sidelines, said Tuna Amobi, entertainment analyst at Standard & Poor’s Equity.
“We don’t know what the independent appraisal will be that determines how much Google will be paid for its stake, and determines what the IPO pricing and the exchange ratio for Time Warner shareholders will be,” Amobi said. “Until those things are clarified, I think you’re going to see the shares trade sideways.”
The company had said in April that it expected to spin off some or all of AOL.
In a memo to employees obtained by All Things Digital, Bewkes said that as an independent company, AOL “should be a stronger competitor that is better able to deliver new and innovative products and services.”
Now that Time Warner has solved its problem with AOL, the company will likely turn to its next operating division with limited upside ? the Time Inc. publishing arm, says Amobi.
“It makes sense to think about strategic options for that asset. The publishing business is going through a major secular challenge that we think is going to be more stark when the economy starts to recover,” Amobi said.
Time Warner’s film and television businesses will be undervalued compared to some of the company’s peers because of the drag Time Inc. will remain on the stock, Amobi said.
In the first quarter, Time Inc. revenue fell 23 percent, reflecting a 30 percent decline in ad sales.
Bewkes told analysts on April’s earnings call that the unit, which includes magazines such as Time, Sports Illustrated and People, remains an “attractive” asset.
He pointed out that magazines are “a very different business” from newspapers.
“Magazine readership is growing, whereas newspaper readership is declining,” Bewkes said.
In March, Time Warner named Tim Armstrong, a former Google advertising executive, as chief executive of AOL and indicated that the appointment portended a separation of the Internet service provider.
AOL, for many years known primarily as a dial-up Internet access provider, has been focused in recent years on the AOL.com portal. Its advertising business operates an online display network that reaches more than 91 percent of the domestic online audience, but display advertising has been declining over the past two-and-a-half years.
Ad revenue at AOL grew 46 percent in the third quarter of 2006. By the third quarter of 2007, that growth had narrowed to 13 percent, and by last year’s September period, hampered by the severe economic downturn that has now plagued the world for eight months, ad revenue declined by 17 percent.
In the most recent three months, ending in March 2009, ad revenue fell 20 percent.
AOL’s $106 billion buyout of Time Warner, announced in 2000 during the heady days of the dot-com boom, was completed a year later. Hopes for the deal were dashed almost immediately as the Internet bubble burst. The stock crashed from a split-adjusted $71 in January 2000 to $8.70 by July 2003.
During that long stock slide, the company, which had been called AOL Time Warner after the merger, dropped the “AOL” from its name.
Former CEO Dick Parsons repeatedly told investors during the 2002-06 period that AOL was the key to unlocking the “hidden value” in Time Warner’s stock price. But the shares couldn’t get untracked as media stocks generally began to fall out of favor due to uncertainty about changing consumer habits and, eventually, a recession that began during 2007.
(c) 2009, MarketWatch.com Inc. Source: McClatchy-Tribune Information Services.
