Yesterday, we recommended that Time Warner sell AOL to Yahoo, and explained why we think this would be a smart deal for all parties. This morning, we began to hear some specific push-back about why Time Warner would not pursue the deal as we outlined. Specifically:
- Time Warner wants $20 billion for AOL, not the $13-$15 billion “fair price” we estimated.
- Time Warner doesn’t want Yahoo stock: It wants cash.
Fair enough. We’ve run some more numbers, and we still think there’s an AOL-Yahoo deal here. This said, we also think that Time Warner’s lust for cash, lack of interest in partnerships or “synergy” (new CEO Bewkes has said that synergy is b.s.), and Yahoo’s flimsy financial capacity opens the door for another player to enter these discussions: Microsoft (MSFT)…
Microsoft could outbid Yahoo for AOL–and, based on past behaviour, almost certainly would. Microsoft could also hand over $20 billion in cash and barely miss it, whereas Yahoo would have to construct complex equity or debt deal financing.
We think Yahoo would be a better fit for AOL than Microsoft. We also think that, if Time Warner were a different kind of company, a long-term Time Warner – Yahoo/AOL content/equity partnership could yield huge benefits for both sides (that $20 billion of stock could easily be worth $40 or $50 billion in a few years if things go well). That said, Time Warner is not a partnering kind of company, and we think Bewkes would prefer $20 billion today to $40-$50 billion (or $5 billion) in a few years. So the door is wide open for Ballmer & Co.
But here’s what the numbers would look like if Yahoo bought AOL for $20 billion:
- Purchase price: $20 billion
- Currency: Cash
- Financing: $20 billion concurrent equity offering at $24 per share. (To get the financing done, Yahoo would like have to take a discount to the current share price. Yahoo could also finance the deal with less equity and some debt, but we think the market would balk at more than, say, $5 billion of debt. None of Yahoo’s competitors carry a big debt load, and although we aren’t allergic to the idea, we’re not crazy about it. Perhaps some form of convertible, which Yahoo has used well in the past).
- Combination cost savings largely offset by further declines in AOL’s access EBITDA.
- Deal still accretive (see this online spreadsheet).
- Current Yahoo shareholders end up with about two-thirds of the company, new investors with 1/3rd.
- Transaction difficult to pull off and risky, so likelihood low.
Microsoft, however, could pay $20 billion in cash for AOL tomorrow. So we expect Jeff and Steve will have a brief chat before long.
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