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FT.com reports that Liberty Media Corp (NASDAQ: LCAPA) and EarthLink (NASDAQ: ELNK) may enter the bidding for AOL's dial-up internet access operation (which shares a parent, Time Warner (NYSE: TWX), with BloggingStocks). Liberty thinks its advantage is its ability to do a "tax efficient transaction."
Meanwhile Liberty's stake in Time Warner is worth just slightly more than the price tag Time Warner has placed on AOL's dial up unit. As FT.com wrote, "Liberty Media's 103m shareholding in Time Warner was valued at $1.64bn last night, slightly above analysts' $1.5bn valuation of AOL's access business."
Liberty's interest is new but industry analysts have seen EarthLink as "the only likely strategic buyer for AOL's dial-up business." FT.com notes that Rolla Huff, EarthLink's CEO, "told the Wall Street Journal this month that a deal for AOL's access business was something 'worth aggressively pursuing'."
AOL's dial-up operation will have an estimated $2 billion in revenue and throw off $265 million in operating income in 2008, applying EarthLink's 13.24% operating margin. This would mean the $1.5 billion valuation puts $5.66 of value on every $1 of operating income. Details are not available on any offers that may be on the table. But if Liberty offers stock and EarthLink offers cash, the Liberty deal would allow Time Warner to delay paying capital gains on the deal -- if there are any.
But based on Liberty Chairman John Malone's history of extremely long, drawn-out, and complex deals, EarthLink might be a more attractive party for Time Warner since it is likely to try to keep things simpler.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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