AOL’s Future Remains a Game of Speculation

With shares of AOL Time Warner Inc. trading at historical lows, talk of a takeover has become the latest parlor game from Wall Street to Hollywood.

Viacom Inc. Chief Executive Sumner Redstone is among those who have played along, telling investors and analysts at recent meetings that he could -- theoretically, anyway -- contemplate such a deal if his own company’s stock was higher.

“Sumner was musing about the possibilities,” said one investor who has kicked around the idea of an AOL Time Warner acquisition with Redstone.

Few observers take Redstone’s comments all that seriously. Even for such a consummate dealmaker, gobbling up the world’s largest media and entertainment conglomerate remains a real long shot.

Despite its depressed stock price, AOL Time Warner is valued at nearly $50 billion and carries an additional $26 billion in debt. What’s more, the company faces a heap of legal troubles, and any acquirer would have to navigate myriad tax and regulatory hurdles.

Still, that hasn’t stopped the speculation.

In a research report released Thursday, Merrill Lynch media analyst Jessica Reif Cohen sketched out just how such a deal could be done.

“Given the sheer decline in AOL Time Warner’s market valuation, it may not be out of the realm to view the company as a potential takeover target,” Reif Cohen wrote. Besides Viacom, she suggested that Microsoft Corp. and NBC parent General Electric Co. have the wherewithal to pull off such a deal, according to the report.

The increasing conjecture highlights a sad reality: A pall hangs over one of the world’s greatest collections of media assets, including Warner Bros., Warner Music, HBO, Cartoon Network, CNN, TBS, the WB, the nation’s second-largest cable operator, Sports Illustrated, Time and Fortune.

For its part, AOL Time Warner has made clear that it isn’t on the auction block.

Chairman and Chief Executive Richard Parsons has outlined his plan to reinvigorate the company and reduce its staggering debt by selling off just a few of its pieces: book publishing, part of its cable systems group and its Atlanta sports teams.

But that has only served to fuel a stream of destabilizing rumors that any of the company’s assets may be up for grabs.

Just last week, rumors circulated on Wall Street that CNN might be unloaded, and that Tribune Co., owner of the Los Angeles Times, would buy the portion of the WB it does not already own. AOL Time Warner said that neither property is for sale.

“AOL is cheap, people realize it, and some question how they can make something of the situation,” said Mario Gabelli, whose Gabelli Funds are a major media investor and the biggest shareholder in Viacom after Redstone. “Someone might think, ‘Why should we buy CNN when we can take over the whole company?’ ”

AOL Time Warner spokesman Ed Adler, reacting in part to the Merrill Lynch report, said Thursday that a takeover is “highly implausible.” After all, the price of such a deal could ultimately reach more than $100 billion, including debt.

One senior AOL Time Warner executive said that Wall Street would punish any public company foolish enough to make a bid. He pointed to ongoing federal investigations of AOL Time Warner’s accounting practices; numerous shareholder lawsuits; and the fact that the America Online division, once valued at nearly $250 billion, is now deemed virtually worthless by most analysts.

In addition, the uncertain economy and the possibility of war are putting a chilling effect on most big deals.

“AOL’s stock is ridiculously cheap,” said one Wall Street source. “In any other environment, there would be wolves circling.”

Should the wolves ever emerge, Reif Cohen has suggested how they might complete a takeover.

In the case of Viacom, she estimated that an acquisition could be financed, in part, by the sale of Time Warner Cable to a rival such as Cox Communications Corp. That, she said, could raise as much as $44 billion.

As troubled as America Online is, Merrill Lynch’s Reif Cohen said that the unit could be sold off to another Internet company such as Yahoo Inc. or USA Interactive for between $4 billion and $7 billion.

To please regulators, Redstone would also conceivably have to part with one of three broadcast networks that Viacom would own in the wake of an AOL Time Warner purchase: CBS, UPN or the WB. Industry pressure under such a scenario could also result in a sale of AOL’s music company because of Viacom’s stronghold on distribution of music videos through MTV and VH1.

So what would Redstone get in the end?

He would become the undisputed king of cable content, combining AOL Time Warner’s entertainment networks with his own group, which includes Nickelodeon, BET, TNN and Showtime. He also could save about $200 million a year, according to analysts, by merging CBS News and CNN.

“There would be enormous benefits of doing it,” said Gabelli. “Financially, it can be done. But should it be done?”