Google likely to stay put on AOL stake


Starting today, Google Inc, which has a 5% stake in Time Warner Inc's AOL, has the right to force the media conglomerate to bring its Internet division to the market.

But Time Warner investors should not hold their breath if they think this is an opportunity for the media company to finally rid itself of the legacy of its disastrous 2001 Internet merger, once hailed as the deal of the century.

A clause in Google's 2005 purchase agreement for the AOL stake gives the Web search leader the right, but not the obligation, to force a public offering of the shares or a repurchase at fair market value beginning July 1, 2008.

But at current market valuations, Google stands to lose an estimated $500 million if AOL is taken to market, analysts estimate. AOL's $20 billion valuation, established at the time by Google's $1 billion investment, has been cut by half to as low as $10 billion by some projections.

“Under the current market and strategic conditions, Google is unlikely to rock the boat,” Bernstein Research analyst Jeffrey Lindsay said.

Analysts and investors also say Google is enjoying an estimated $70 million to $80 million it gets annually from AOL by providing search advertising services, and is unlikely to want to risk AOL taking its business to rivals.

The July 1 date was viewed months ago as a catalyst for Time Warner's board to speed up discussions to spin off or sell AOL to any interested party, including Yahoo Inc, Microsoft Corp or News Corp.

That is because a similar scenario played out when Comcast Corp sought to resolve its 21% stake in Time Warner Cable in 2003. The two agreed to buy and divvy up the assets of bankrupt cable operator Adelphia, and the deal eventually led to the partial spin-off of Time Warner Cable.

Renewed hopes for an AOL sale or merger sent Time Warner shares rising as much as 2.6% on Monday after Citigroup named the company its top pick within large cap media and entertainment stocks on the conviction that AOL would be sold or merged into either Yahoo or another company.

Citigroup analyst Jason Bazinet estimated the merger of AOL's advertising business and Yahoo would generate $900 million of annual cost reductions.

AOL and companies such as News Corp's MySpace have been driven to conduct deal talks since Microsoft unveiled its pursuit of Yahoo in February - a takeover that threatened to redraw the Internet landscape by creating a more viable rival to Google.

AOL emerged as one of the most attractive alternatives for a deal with either Microsoft or Yahoo after Microsoft walked away from its buyout offer in May, but potential suitors have been wary of its history of strategic missteps and of sluggish growth in its advertising business.

After Yahoo rejected Microsoft's offer to buy its search business and struck a search ad deal with Google in June, the momentum for Internet mergers have slowed, analysts said.

Google's “deal with Yahoo muddies the waters,” said Larry Haverty, a portfolio manager at Time Warner investor Gabelli & Co. “Nothing's going to happen,” he said of Google exercising its option on AOL.

If Google takes no action on AOL, it gives Time Warner more time to seek a partner for the division, which has undergone several restructurings and now focuses its efforts on being a one-stop shop for advertisers.

Time Warner continues to hold talks with Yahoo and Microsoft about potential combinations, sources have said.

But “it's looking increasingly less likely,” Lindsay said regarding Time Warner finding a suitor for AOL. “There's less incentive to take it public now, and less likely that AOL will have a deal with either Yahoo or Microsoft.”

“It's back to status quo with much lower energy,” he said.

Time Warner and Google declined to comment. (Reuters)

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