Time Warner Takes Google Stake

Time Warner (TWX Quote) finally had some good news about the online business Friday -- thanks to Google.

The media and entertainment conglomerate's struggling America Online unit exercised a previously disclosed warrant to purchase stock in Google, the fast-growing search engine that recently announced plans to go public.

Time Warner's stake in Google, which one analyst calculated to be 3% of Google's outstanding shares, could be worth at least a half a billion dollars to Time Warner -- a nice bit of news for a company whose online operations have been the source of much financial and legal pain in recent years.

In Time Warner's 10-Q filed with the Securities and Exchange Commission Friday, the company says that earlier this month it exercised a warrant to purchase 7.4 million shares of Google's Series D preferred stock for approximately $22 million, implying a price of nearly $3 per share.

Each preferred share, says Time Warner, is convertible into one share of Google common stock at any time chosen by AOL, and converts automatically if Google completes an IPO with a certain minimum offering price and proceeds. Time Warner didn't disclose those details.

AOL may be required to agree to a 180-day restriction on transfers of Google stock following an IPO, says Time Warner.

Time Warner didn't calculate the possible value of the Google stock following an IPO, but in a note published Friday morning, Fulcrum Global Partners analyst Richard Greenfield did. Assuming, from data in Google's IPO filing, that the company has 246 million shares outstanding, Greenfield estimates that the company will issue an additional 45 million shares as part of the public offering.

Based on the received wisdom that Google's market capitalization, post-offering, will be at least $20 billion, Greenfield calculates that Time Warner's post-IPO Google stake would be worth at least $500 million, or 11 cents per Time Warner share. (With a $50 billion market cap for Google -- the high end of speculated values -- Time Warner's stake would be worth $1.3 billion, or 30 cents per Time Warner share, he estimates.)

Though the value of Google to Time Warner is thus "not terribly significant," writes Greenfield, "it is all incremental value that is not factored into Street expectations/valuation."

Ironically, another apparent beneficiary of Google's expected success is archrival Yahoo! (YHOO Quote). In 2000 the big Net media player bought $10 million in Google stock and received a warrant to buy 929,764 shares, according to a 2001 filing. It's unclear how much of a stake Yahoo! currently holds in Google, and what adjustments should be made to the size of that warrant based on any subsequent stock splits. A Yahoo! spokeswoman didn't immediately respond to a request for comment Friday.

In addition to making money for Yahoo! and Time Warner, of course, Google's IPO is expected to raise billions of dollars for Google itself. Google's filing gives little clue as to what the company specifically plans to spend its IPO windfall on. But there's little doubt that Google, which has already radically remade the landscapes of searching and advertising on the Web, could continue to have an oversized influence.

Greenfield has a buy rating on Time Warner's stock, which fell 24 cents to $16.75.