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AOL spin-off? Possible but Wall St says unlikely

AOL Time Warner Inc shares have fallen to levels that have caused some on Wall Street to have visions of an AOL spin-off, but most believe such a move any time in the near future is unlikely.

Shares of the world's largest Internet and media company have fallen 70 per cent since its $106.2 billion deal to buy Time Warner, bringing it to a level that many analysts said values the AOL Internet unit at almost zero. This has led some to mull "what if" scenarios for spinning off AOL.

Even the mere thought of such a move suggests how much has changed since AOL agreed to buy Time Warner in January 2000.

At that time, investors had worried that Time Warner's "old media" businesses of music, film, publishing and television would drag down the growth of hypercharged AOL.

Now investors are worrying about AOL's expansion as subscriber growth slows and advertising remains in the doldrums, leading many to question the benefits of the largest US merger.

"When things start to get bad, people look for ways to get the stock price off was the whole point of the merger," Vick Khoboyan, analyst at Financial Management Advisors, which owns AOL shares. "Spinning it off is throwing the synergies of the deal out the book. That is the nail in the coffin (proving that the deal has failed)."

Wall Street analysts said a spin-off was unlikely to lead to much appreciation in the company's battered shares.

Shares of AOL Time Warner closed down $1.06, or 5 per cent, at $19.87 near December 1998 lows ahead of its quarterly results Wednesday.

"Unless they're able to sell it for cash, there's no way to sell it for any more than its public market value, which is somewhere between $6 to $8 per AOL Time Warner share. It can have that value within AOL Time Warner or by itself. But either way it doesn't change the formula here," said Jordan Rohan, analyst at SoundView Technology.

AOL Time Warner spokesman Ed Adler said a spin-off of the AOL operations was "nothing that we are contemplating."

NEVER SAY NEVER

Still, some on Wall Street didn't rule out such a move down the line.

Once the company improves operating performance and finds ways to maximise value in the near-term, every option will become a possibility although not necessarily a probability, said Gerard Klauer Mattison analyst Jeff Logsdon.

"Maybe in 12 to 24 months AOL decides it was a mistake and splits up, but not now," said one banker who asked not to be identified. "These guys are not like (AT&T's) Mike Armstrong. They will stick to the vision until it's clear it won't work."

Kaufman Bros analyst Paul Kim said a possible deal with No 5 cable operator Cox Communications Inc would make more sense for the company, giving AOL access to an additional 6.3 million cable subscribers who could potentially become customers of its high speed service.

AOL Time Warner executives declined to comment.

However, some industry sources said a deal would have so many obstacles, such as regulatory approval and control issues, that it could be some time before it could come to fruition.

FORMULA FOR GROWTH

In hopes of recharging growth, AOL Time Warner brought in co-chief operating officer Robert Pittman to head up the AOL operations, replacing Barry Schuler.

The company seems to be betting that Pittman's marketing and advertising savvy will help drive growth in the near-term versus Schuler and AOL Time Warner Chairman Steve Case's longer-term vision of digital services and new gadgets.

AOL on Monday named ad veteran Robert Sherman president of the unit's interactive marketing. He replaces Robert Friedman who takes on the new role of senior vice president of corporate marketing in charge of developing cross-platform deals.

Investors hope to get a clearer picture about what executives plan to do to allay concerns of slowing AOL growth from the company's results and earnings call Wednesday.

The big question is whether AOL will focus on its slowing dial-up access business until a critical mass adopts high-speed services or whether AOL is going to go full speed ahead to sign up deals with cable operators to offer broadband -- seen as the key area for Internet companies' future growth.

"It may be having some digestion problems. There are some issues they grew so fast and now they have to hang on to their subscribers. Maybe they are not growing as fast as the financial markets think they should be growing but they still expect growth," said Alan Gerry of Granite Associates and a major AOL shareholder.

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