Web 3.0 & Time Warner (Part 5)

Conclusion

Time Warner’s businesses include AOL, Time Inc., Time Warner Cable, Home Box Office, New Line Cinema, Turner Broadcasting System and Warner Bros. Time Warner is contemplating spinning off a portion of Time Warner Cable at some point in the future, and is also rumored to be exploring the possibility of spinning out AOL and/or Time, Inc.

Rumors of a strategic restructuring of the business in the next 12 to 18 months after the changes in the top management are also doing the rounds. There are various restructuring options on the table for Time Warner, which include a full spin-off of Time Warner Cable, a spin-off of Time Inc., or a spin-off or monetization of AOL, any and all of which would help clean up the company’s currently confusing state.

Time Warner’s global web services company AOL has been steadily shifting its focus from providing web access services to providing online content and services. AOL’s search page views have been declining rapidly over the past year due to the significant loss in its access business, which normally drives traffic to AOL’s search portal. AOL, on the other hand, has been gaining unique visitors because of its ad-supported free content/services strategy.

AOL has been able to generate higher revenues on search recently due to improving monetization and its revised deal with Google. The success of AOL’s search products will largely depend on how it is able to develop and drive traffic to its verticals, which I believe is the key to the future monetization of AOL, not horizontal search. The Company is also forming Platform A, which will become the front-end technology for AOL’s advertising sales with the ability to serve ads to Advertising.com and other AOL branded sites. The Platform A initiative is expected to drive ad volumes even if there are worries of CPMs declining in the shorter term.

AOL’s ad revenues are expected to grow at 14-15% in 2H07 and 10-11% in 2008. Currently, AOL accounts for approximately 15% of consolidated Time Warner EBITDA.

Time Warner is on target to earn $46.3 billion in revenues in 2007 and an EPS of $0.96. The Company is trading at a forward P/E of 18.3 based on an EPS of $0.96 in FY2007. I feel the TWX stock is trading at a discount to its intrinsic value. A premier entertainment and media company like Time Warner with branded properties should trade at a minimum forward P/E of 24 – 25, which gives a fair price of $24 – $25 for the stock, well above the current ~$18 trading range.

Being a large diversified media company Time Warner trades at a discount to its fair value and this presents an opportunity to restructure the business so that the Company is able to get the premium valuation that its core media assets deserve. I think with the change in the top management we are going to see the necessary strategic restructuring of the Company’s portfolio, which could result in the sale of Time Warner Cable and spin-off of AOL and Time Inc. into either one or two different businesses. The combination of AOL and Time, Inc. is not a bad combination at all, give that both of them need to build out their presence in the top online verticals. CNNMoney, I think, remains the only complicated piece of the equation in that restructuring, since that involves Turner.

I don’t think the Company is going to sell AOL to Yahoo or Google, as it is strategic to its dream of emerging as a leading new media entertainment conglomerate. The Company has been aggressively investing in developing newer verticals, rolling out sites in various countries, acquiring advertising technologies like Tacoda, and entering into partnerships with leading Internet properties like Kayak, Match, CareerBuilder, etc. to serve up quality content, commerce, community and vertical search services. AOL’s strategic shift, thus, is already well on its way.

However, the long-term success of Time Warner depends on how quickly and effectively the Company is able to execute the strategic restructuring.

[Part 1] [Part 2] [Part 3] [Part 4]

This segment is part 5 in the series : Web 3.0 & Time Warner
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