By Kenneth Li
Investors in Time Warner Inc., whose shares touched a two-year low in
mid-July, are seeking signs of a turnaround on August 2, when the
world's largest media company is set to introduce its fourth plan in
five years to save its online unit AOL.
AOL is widely expected to announce that it will give its e-mail and
Web services away for free, hoping to win back customers who had
switched to other free services from rivals like Google Inc. and Yahoo
Inc.
The new strategy, which will be discussed at a Time Warner board
meeting in New York on Thursday, aims to boost online advertising
sales, but analysts say it is a risky move as its subscription
business currently accounts for 80 percent of AOL's revenue.
AOL is still expected to continue to charge for dial-up Internet
access, but it will no longer advertise the service.
"I think a lot is riding on August 2," said Larry Haverty, a portfolio
manager at Gamco Investors, which owned 14.1 million shares of Time
Warner as of March 31. "People like us have been patient with
strategy. From what I've heard, I'm comfortable. "But seeing is
believing," Haverty added.
Once the reigning king of online services, AOL has lost about 30
percent of its subscribers since 2003. The 2001 merger of AOL and Time
Warner has been blamed for destroying some $200 billion in market
value.
Free services are now viewed by some investors as the only hope of
survival for AOL in a world dominated by faster-moving companies,
including News Corp.'s MySpace.com.
"They should have done what they contemplated two years ago to
aggressively develop AOL as a web service," said Morris Mark at Mark
Asset Management, which owns 1.22 million Time Warner shares as of
March 31. "Its position is so much more powerful than the advertising
revenue that they're generating.
Time Warner's enterprise value trades at 7.6 times its expected 2007
earnings before interest, tax, depreciation and amortization, compared
to News Corp.'s 11.9 multiple and Walt Disney Co.'s 9.81 multiple.
TOO LATE?
Gamco's Haverty hopes Time Warner's online advertising sales will rise
at least 30 percent, when the company posts its second quarter results
on Aug 2.
That would put AOL roughly on par with Yahoo, but still lag Google's
77 percent advertising growth in the second quarter.
AOL strategists may be emboldened to act aggressively after a 26
percent growth in online ad sales in the first quarter.
But a Wall Street Journal report earlier this month cited unnamed
sources as saying Time Warner could lose up to $1 billion through 2009
from its plan to offer free services.
Time Warner on July 11 dismissed the report and called the newspaper's
assessment "incomplete" and laden with "largely erroneous financial
information."
Six days later, its stock had slipped to a two-year low.
"Time Warner's stock chart is like the flatline EKG of a dead person
for the last three years," Joan Lappin, chairman of Gramercy Capital
Management, wrote in Forbes.com, calling for Chief Executive Richard
Parson's resignation.
Lappin, whose firm no longer holds media stocks, was a longtime media
analyst who has watched the company since the late 1960s, when it was
just a magazine publisher.
The sentiment on Time Warner's stock, however, appears to be improving
judging by activity in the stock options market.
There are already more than 200,000 outstanding calls that give
holders the right to buy Time Warner shares at $17.50 and $20 by
mid-January 2007. The stock closed at $16.27 on Wednesday on the New
York Stock Exchange.
"The high open interest is a sign that players have been positioning
in these options, and placing relatively cheap bets that Time Warner
will rise between now and the end of the year," said Frederic Ruffy,
an analyst at Optionetics, a California-based options education firm.
Haverty said he hopes the stock gets a 10 to 15 percent boost when the
dust settles.
(Additional reporting by Doris Frankel in Chicago)
Copyright 2006 Reuters Limited.
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Kenneth Li (reuters@telecom-digest.org)