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Time Warner to Spin Off AOL This Year

5/30/2009 1:00 AM Eastern

Time Warner Inc. last Thursday laid out 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 of 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.

AOL, which merged with Time Warner in 2001 in a deal then 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.

AOL chairman and CEO Tim Armstrong, whom Time Warner hired in mid-March, said: “Becoming a standalone public company positions AOL to strengthen its core businesses, deliver new and innovative products and services, and enhance our strategic options.”

The AOL spinoff was set into motion in April, 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.

Time Warner said the proposed transaction will be structured as tax-free to stockholders.

September