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Time Warner Entertains Idea For Possible AOL Offshoot

April 7, 2009

Time Warner Inc has requested various bondholders to change credit terms, a step anticipated to transition the way for an offshoot of its troubled Internet unit AOL, Reuters accounted on Monday. 

The media corporation said the modification in credit terms will take into account possible change in AOL ownership.

AOL was one of the initial units to introduce people to the Internet.  However, cable and phone companies have flooded the markets stealing away subscribers, and Google and others have taken over online advertising, pushing AOL aside as a mere remnant of the early Internet.  

Former Google Inc executive, Tim Armstrong was invited last month by Time Warner’s Chief Executive, Jeff Bewkes, to direct AOL with the potential notion of heading up a by-product. 

“We view this announcement as significant as it clears a major hurdle to spin AOL to Time Warner shareholders,” Sanford Bernstein analyst Michael Nathanson said in a note to clients.

With a series of analysis indicating the decreasing value of the assets as well as a dawdling online advertising market, AOL has been regarded as one of the most futile units at Time Warner.  HBO, film studios and the Time publishing unit are inclusive of Time Warner’s portfolio. 

Time Warner has projected its approximated earnings growth would double between 2009 to 2012 if AOL is divorced from the company.  Last year AOL was valued at an estimated $10 billion, but Nathanson reported its individual value apart from Time Warner is currently valued at a distant $2.4 billion. 

Management at Time Warner is hastily seeking to determine AOL’s fortune by presenting each bondholder that consents a payment of $5 for each $1000 principal amount of debt.  To persuade and insure the deal, Time Warner has guaranteed HBO Inc as collateral. 

A by-product is now probable, analysts at Bernstein and Citi believe.  In “the next few months,” Nathanson said it could likely be publicized.

The alleged consent solicitation is to revise the agreement covering close to $12.3 billion of outstanding arrears.  It amounts to a payment by Time Warner to the bondholders of nearly $61.5 million if they all commit to the proposal.  Unless prolonged for some reason, the solicitation will terminate at 5 p.m. New York time on April 15.

Time Warner shares plummeted 95 cents in early trading to $21.27, coinciding with a vast market downturn. 

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