Now that another round of surgical layoffs is done, the new buzz in Dulles is whether AOL investor Google will exercise its right to force Time Warner to take AOL public or buy its AOL stock back (with the choice between the two being Time Warner’s).
The backstory: In December 2005, when Google agreed to invest $1 billion for 5% of AOL, it received the right to force Time Warner to conduct an AOL IPO or buy AOL’s stake back at “fair market value” as of July 1, 2008, about six months from now (Formal language after jump). For obvious reasons, many AOL employees want an IPO, so some are rooting for Google to demand one.
The decision tree here is complicated, so it’s not clear what will happen. The bottom line is that we think Google’s IPO/Put right makes a near-term AOL spin off (and Time Warner break-up) more likely…
AOL’s fair market value has deteriorated significantly since December, 2005, and is almost certainly well below the $20 billion Google paid for it. (We would put it at $10-$15 billion, with a bias toward the low end of the range). Google is probably not in a hurry to take a loss on its investment, especially when Google’s search deal with AOL is still generating some revenue (the right to force Time Warner to do something it might not want to do–take AOL public or cough up $1 billion is presumably worth something to Google at the search-deal negotiating table). An AOL IPO might make more sense for Google, as it would be able to dump its stock quietly on the open market and/or easily acquire a lot more of AOL.
Time Warner, meanwhile, is probably not eager to buy any more of AOL (the sale of some of the stock has been a good move, so far, as Google has absorbed some of the loss), so it will probably either agree to take AOL public or try to talk Google out of exercising its IPO rights.
Bottom line: Google’s IPO rights make an AOL IPO more likely. This, in turn, makes it more likely that Time Warner will just decide to break itself up.
Google’s AOL “Put”
Google 8-K, Dec 23, 2005
Beginning on July 1, 2008, we will have certain rights to require HoldCo to register the HoldCo interests held by us for sale in a public offering. If we exercise this right, Time Warner will have the right to purchase our interests for cash or shares of Time Warner stock based on an appraised fair market value of our equity interest in HoldCo in lieu of conducting an initial public offering.
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