Time Warner Inc. Announces AOL Spinoff Plan

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Time Warner Inc. announced Thursday plans to spin off its troubled AOL online division by the end of 2009, which would undo what has become seen as one of the biggest failed mergers from the dot-com era.

The company said its board of directors authorized the "complete legal and structural separation of AOL from Time Warner," to make AOL an independent publicly traded company.

After the proposed separation is complete, AOL will continue to operate its flagging dial-up Internet-access services, which had 6.3 million subscribers at the end of March -- down from a peak of more than 24 million at one point. AOL will be "focused on growing its Web brands and services" and advertising business, Time Warner said, and has attributed the drop in dial-up subscriptions partially to its refocusing on ad-supported Web services.

AOL, which merged with Time Warner in 2001 in a deal valued at more than $100 billion, has continued to drag down Time Warner's financial results. AOL's revenue for the first quarter of 2009 dropped 23%, to $867 million, pushing Time Warner's revenue and cash flow down 7% each.

In announcing the plan Thursday, Time Warner chairman and CEO Jeff Bewkes said in a statement: "We believe that a separation will be the best outcome for both Time Warner and AOL. The separation will be another critical step in the reshaping of Time Warner that we started at the beginning of last year, enabling us to focus to an even greater degree on our core content businesses. The separation will also provide both companies with greater operational and strategic flexibility. We believe AOL will then have a better opportunity to achieve its full potential as a leading independent Internet company."

AOL chairman and CEO Tim Armstrong, whom Time Warner hired in mid-March, said: "This will be a great opportunity for AOL, our employees and our partners. Becoming a standalone public company positions AOL to strengthen its core businesses, deliver new and innovative products and services, and enhance our strategic options. We play in a very competitive landscape and will be using our new status to retain and attract top talent. Although we have a tremendous amount of work to do, we have a global brand, a committed team of people, and a passion for the future of the Web."

The AOL spinoff was set into motion last month, when Time Warner asked bondholders to vote on an exchange of $12.3 billion in debt guarantees to Time Warner's HBO unit, which would unlock restrictions on transferring the assets of AOL -- essentially, moving the debt off AOL's books and backing it up with HBO's assets.

Time Warner currently owns 95% of AOL, and Google holds the remaining 5%. As part of a prior arrangement, Time Warner expects to purchase Google's 5% stake in AOL in the third quarter of 2009. After repurchasing this stake, Time Warner will own 100% of AOL whereupon Time Warner shareholders will own all of the outstanding interests in AOL.

According to Time Warner, the proposed transaction will be structured as tax-free to stockholders. The transaction must clear review by the U.S. Securities and Exchange Commission and the final approval of transaction terms must be approved by Time Warner's board.

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