ISPs see hope in AOL regulation
zdnet.com
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Dec 15, 2000 (The Star-Ledger - Knight Ridder/Tribune Business News via COMTEX)
-- If you think America Online Inc.'s shares have gotten hammered in the past 12months, just sneak a peek at fellow online media company Yahoo Inc., its closest living dot-com relative.
Yahoo is down 80 percent so far this year.
Measured against that decline, AOL's 45 percent drop doesn't seem so bad --relatively speaking.
The point:
The market trashed AOL shortly after it announced plans to buy Old Economy stalwart Time Warner on Jan. 10. But this same deal that confounded so many investors 12 months ago may in fact have shielded the 15-year-old Internet company from the Net implosion that ravaged so many of its dot-com peers this past spring, analysts said.
"If you look at AOL vs. 99 percent of all other dot-coms, its share price has fallen a lot less than the Yahoos of the world," said Ruairi O'Neill, an analyst with PNC Advisors. Yesterday, the Federal Trade Commission approved AOL's $111 billion acquisition of Time Warner, a union that will touch the lives of so many consumers.
The transaction still must be approved by the Federal Communications Commission,
which is expected to take several weeks. European regulators blessed the deal in
October.
AOL and Time Warner will start their new life -- and year -- together in a world
that's vastly different from the one they left behind on Jan. 10, 2000, when the
deal was first announced.
Back then, skeptics thumbed their noses at this marriage of old and new media,
which promised to combine AOL's captive base of 28 million online subscribers
with Time Warner's deep lineup of films, magazines and cable properties,
including CNN.
Wall Street didn't know how to value this never-before-seen corporate hybrid. Was it a media company? An Internet company?
And diehard dot-com investors, who adored AOL as a stand-alone Internet company,
cringed at the prospect of owning an anemic old- timer like Time Warner, which was founded in 1923.
Today, however, the investment world has been jolted back to sobriety. The
Internet bubble has burst. The Nasdaq is down 33 percent for the year. And
once-promising dot-com companies are hemorrhaging cash or shutting their doors
for good.
Suddenly, AOL's decision to marry the button-down Time Warner doesn't look so
bad.
And many money managers and analysts who once scratched their heads, trying to
figure out the logic and math behind the deal, now believe AOL's stock is
downright cheap and that the new combined company will emerge stronger than it
was before the proposed merger.
Consider this see-saw ride: The day before the deal was announced, AOL was
trading at $73.75. Since the deal was announced, AOL shares have plunged,
hitting a low of $37 in mid-October. Yesterday, shares of Time Warner rose $1.90
to $74.50 on the New York Stock Exchange. AOL shares rose $1.55 to $50.
"If you're a patient investor, this is a pretty good entry point," said Andrea
Rice, an analyst with Deutsche Bank, during a recent Webcast discussing the AOL
Time Warner deal. "The down side is very limited and the up side, although it
might take a bit longer than we expected, is significant. AOL Time Warner looks compelling."
Despite a tough regulatory review in Europe and Washington and the spring dot-com shakeout that punished so many technology stocks, Wit Soundview
technology analyst Jordan Rohan remains as bullish as ever on the potential of AOL Time Warner.
The new company expects to have north of $40 billion in revenues, growing at a 12 to 15 percent rate annually, he said.
But a much more important figure to keep an eye on is the combined companies'operating cash flow, also called "EBITDA" (earnings before interest, taxes,
depreciation and amortization), he said.
Media giants are valued on a multiple of their EBITDA.
Many people believe AOL Time Warner's 2001 operating cash flow is going to grow at 25 to 30 percent, off an $11 billion base.
"We remain optimistic about the fundamentals for AOL Time Warner, despite the
challenging environment in online media and equally difficult condition in some
part of traditional media," Rohan told clients Monday.
And while companies -- online and traditional -- have been scaling back their ad
budgets in the face of a slowing economy and the dot-com meltdown, Rohan
believes advertisers will enthusiastically embrace the new AOL Time Warner
platform.
"There's a lot of room for them to increase market share," said Rohan, who has set a 12-month price target for AOL Time Warner of $80. "This is the one company
that I'm very confident will meet analyst expectations."
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Valuing AOL Time Warner
Investors must wrestle with trying to value shares in a new kind of company
December 15, 2000: 2:13 p.m. ET
NEW YORK (CNNfn) - When AOL completes its acquisition of Time Warner it will create a kind of company as yet unseen on Wall Street, and investors will have to grapple with how to value a combined media and technology behemoth.
On Thursday, the Federal Trade Commission approved the $111 billion merger, which the companies expect to complete at the end of this year or early 2001.
ABN Amro said in its weekly commentary that the deal "creates a cash flow powerhouse with unparalleled content, distribution, and direct merchandising opportunities."
"We cannot think of another combination of two or more entities that approaches the strength and positioning of this combination," the report said.
What's this thing worth?
According to analysts, those valuing the combined company should treat it as both a media powerhouse and a high growth company, but the fundamentals will remain the same.
"AOL Time Warner will be valued like a traditional media company with superior growth prospects," said Fred Moran, analyst with Jefferies and Co.
Moran said even discounting all possible new business initiatives, the company is capable of growing at about 25 percent, but with the ventures it could see first-year growth of 30 percent.
"When they start to cross-promote and cross-sell their products those Time Warner assets should see an enhancement to their growth rate," he told CNNfn. "Plus we are on the verge of a breakout in growth of high-speed cable modems, which will drive those cable bills. That's half of Time Warner's cash flow. So Time Warner looks very cheaply valued here"
"I think the old rules still apply," said ABN Amro analyst Arthur Newman. "The company's value is related to its cash flow."
Newman said based on that, the company looks very attractive. He added investors should keep a look out for EBIDTA (earnings before interest, depreciation, taxes and amortization) growth as well, as media companies have been traditionally valued on that basis.
According to First Union Securities analyst Scott Davis, how to value the company is not as much of a mystery as it was when the deal was first announced and compared with companies like Disney (DIS: Research, Estimates) and Viacom (VIA: Research, Estimates), AOL Time Warner stock looks cheap.
"The company should be compared to other media companies and large-cap growth companies, which usually come from the tech sector," Newman said.
Other comparable companies mentioned by analysts were News Corp. (NWS: Research, Estimates), Vivendi Universal (V: Research, Estimates), Yahoo! (YHOO: Research, Estimates), and possibly even Microsoft (MSFT: Research, Estimates) and Cisco (CSCO: Research, Estimates).
Merrill Lynch Internet analyst Henry Blodget said the stock would be a very good investment, but over time.
"I think it's important to understand that this is not a go-go stock," Blodget said. "It's not the Internet stocks of a year ago or two years ago. But as a good, long-term investment, we really like the stock. We think the company's very well-positioned, valuation is reasonable, which is very hard to say for a lot of Internet companies over the last few years."
In a research note issued Thursday, SG Cowen reiterated its "strong buy" rating on the stock, with a price target of $100 to $110 based on Time Warner's (TWX: Research, Estimates) current share price.
Although it is hard to predict what AOL and Time Warner may have up their sleeves when the merger is completed, but Moran said consumers will have interactive television and high-quality streaming video much faster than they would have without the merger.
In afternoon trading on the New York Stock Exchange, shares of AOL (AOL: Research, Estimates) fell $2.90 to $47.10, while Time Warner fell $3.50 to $71.
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