Time ticks away towards decision on AOL

Dick Parsons, chairman and chief executive of Time Warner, is close to making a decision about the future of the company’s AOL internet business that could prove pivotal to the media group’s share price as it faces a battle for board control.

In the coming weeks Mr Parsons is likely to choose whether to team up with Microsoft or Google, the two companies that have been in talks for months about buying a minority stake in AOL.

The decision is particularly important because AOL is regarded as an undervalued part of Time Warner’s media businesses, which include Time Inc publishing, Time Warner Cable and the Warner Brothers studios, and CNN and HBO, the cable channels.

If Mr Parsons can make a deal that pushes Time Warner’s share price decisively above $18, it would remove some of the pressure from a group of shareholders led by Carl Icahn, the billionaire financier, for radical changes and board control at Time Warner.

“It [an AOL deal] could neutralise the Carl Icahn pressure, possibly eliminating what could otherwise become a costly distraction,” says Douglas Shapiro, analyst at Banc of America Securities.

Mr Parsons has still not determined whether to sell a stake in AOL as part of the transaction or whether to pursue a partnership with Microsoft or Google that does not include giving up a share in AOL, according to people briefed on discussions.

“It is likely Time Warner will get to the end of the process over the course of the next couple of weeks,” says a person familiar with the deal. “Things are winding to a close but whether there is a business partnership announced or whether a stake in AOL will be sold is still under discussion.”

According to some participants in the talks, Microsoft and Google have made offers for a minority stake that would value AOL at more than $22.5bn. The stock market values AOL much lower, at about $10bn, or $2 per Time Warner share, according to Banc of America.

“The best chance of pushing Time Warner shares higher would come from announcing a deal valuing AOL at over $20bn, but selling just a very small stake to Microsoft or AOL, which would allow Time Warner to keep exposure to the growing internet advertising market,” says one banker.

The interest in AOL comes after years of uncertainty in the division. Mr Parsons, who took over as chief executive in 2002 and wants to retain control of AOL, has presided over a difficult period at Time Warner following its merger with AOL at the height of the internet bubble.

Since then, far-reaching changes have been undertaken at AOL, which continues to be widely used for internet access in the US. The growth in broadband internet connections is leading to a decline in this dial-up business, however, and AOL this year recast itself as a free-access internet portal aimed at capturing a slice of the growing internet advertising market.

Nielsen/NetRatings estimates that in September AOL had a unique audience of 72m in the US. MSN, Microsoft’s internet business, had 89m and Google 79m. The top slot is taken by Yahoo with 99m.

“Both Microsoft and Google know that AOL could change their relative position for the future,” says one Time Warner investor. “This should allow Dick Parsons to get a good value for AOL.”