Ailing AOL no closer to a sale

Although CEO Jeff Bewkes and his Time Warner (TWC) cohorts put a positive spin on the company’s second-quarter results Wednesday, we’d sum up the call as bafflingly uneventful. The company highlighted gains in its TV and movie operations, while remaining virtually silent on its plans for AOL’s legacy Internet access business. If anything, the news concerning the ailing AOL division worsened, with Time Warner indicating that the AOL split is not set to occur before early 2009. The lack of urgency on the part of Bewkes amid declining AOL subscriber count and revenue is extremely disheartening.

Subscriber count at the legacy AOL division fell to 8.1 million subscribers from 10.9 million a year ago. This continues the trend of a year-over-year decline of an average 20-25% since 2003. For the first time in AOL’s history, revenue from advertising tops revenue from its subscription business ($530m and $491m, respectively). Operating income for the AOL division is $230m, one-third of which we estimate comes from subscriptions. This is in contrast to Earthlink (ELNK), which has seen its operating income steadily increase quarter-over-quarter for the past year. EarthLink’s operating income from its most recent quarter was $64m, despite having only 3.3 million subscribers. Clearly, AOL is failing to properly make money from its subscribers. We suggest the company turn the business over to someone who can do that as soon as possible.

Fortunately, there appears to be a suitor for the AOL legacy business. EarthLink CEO Rolla Huff has said he’s ready to discuss a deal. Time Warner should take him up on that immediately. If AOL’s subscriber base continues to decline (and there is no reason to believe it won’t), by the time Bewkes is ready to negotiate a sale, it will be in the six million range. Our advice to Bewkes: Put together a deal book on AOL and get out of the subscription business while you can.

AOL ISP divestitures

Announced Target Acquirer Deal value Price per subscriber
Oct. 2007 Albanian ISP business Telekom Slovenije $5.6m $2,489
Oct. 2006 UK ISP business Carphone Warehouse $712m $339
Sep. 2006 French ISP business Neuf $365m $730
Sep. 2006 German ISP business Telecom Italia $878m $366
Dec. 2005 Argentinean ISP business Datco $1m $67
Feb. 2004 Australian ISP business Primus $18m $200

Source: The 451 M&A KnowledgeBase