Icahn, Time Warner: Not Just Fishing Expedition

Publishing

Publishing, while tried and true, is not a growth industry and is probably holding down valuation analysis on Time Warner. Subscription revenue was flat with last year and advertising revenue was up 4%, thanks to an overall improvement in the advertising industry across the economy. Although Time Warner's brands are recognized everywhere (People, Sports Illustrated, Fortune,, etc.) it' not clear where the growth is and the companies that can be roughly called comps (perhaps Gannett(GCI Quote) or the New York Times(NYT Quote) ) have been trading at single-digit multiples of EBITDA due to lackluster or slowing growth.

AOL

Ironically, AOL would perhaps be the area with the most value in a breakup. Subscription revenue is going down ($3.5 billion in the last six months compared with $3.8 billion in the year-ago period) but advertising revenue is up significantly ($631 million vs. $435 million in year-ago period). Net income for the division is up 25%, from $553 million in the six months ending June 30, 2004, to $692 million in June 30.

A dip in overall revenue while net income is going up shows the bottom-line influence of the ad-based model. While AOL is going to try to improve subscriber revenue with a little help from the cable division through some joint marketing (although no effect from this will be seen in 2005 due to the usual synergistic collapse that happens with every good intention), my guess is it will slowly cut membership costs to be competitive with other broadband solutions and scale up the promotion of its services in order to continue to boost advertising.

If AOL got even one-third the EBITDA multiple of Yahoo!(YHOO Quote) or heaven forbid, CNet, it would be accretive to shareholders in any breakup scenario.

Valuation Problem Is the Whole, Not the Parts

The basic problem with Time Warner is not any of its divisions, because all are performing well and represent best-of-breed branding in every area. The problem is that Time Warner has perpetually been difficult to value and often has engaged in very complex financial transactions that have left shareholders scratching their heads.