• by Gavin O'Malley  @mp_gavin, June 16, 2010

 UPDATE:AOL confirmed early Thursday morning that it sold Bebo to Criterion Capital Partners.

Word is that AOL is close to selling Bebo to private investment firm Criterion Capital Partners LLC. However, the Web company on Wednesday declined to comment on the status of the social network.

"We don't comment on rumors or speculation," a company spokeswoman told Online Media Daily.

Industry blog Mashable broke news of the would-be deal on Wednesday, citing "sources close to the deal." Wall Street Journal reporter Anupreeta Das also tweeted that Criterion Capital was close to buying Bebo, but the tweet was quickly taken down. Later on Wednesday, the Journal reported that Criterion and AOL were close to signing a deal.

"Exact terms of the deal could not be learned, but a person familiar with the situation said the price is a small fraction of the $850 million AOL paid for the site two years ago," the Journal reported Wednesday.

In April, AOL said it was considering selling or "shutting down" Bebo this year. The news was included in an annual filing for Bebo in the UK with Companies House. "We are currently evaluating strategic alternatives with respect to Bebo, which could include a sale or shutdown of Bebo in 2010," a company spokeswoman said at the time.

In an internal memo sent to employees in April, AOL admitted that social networking had become too challenging a market, and that it required scale that Bebo lacked.

"The strategy we set in May 2009 leverages our core strengths and scale in quality content, premium advertising and consumer applications, positioning us for the next phase of growth of the Internet," read the memo. "As we evaluate our portfolio of brands against our strategy, it is clear that social networking is a space with heavy competition, and where scale defines success."

"Bebo, unfortunately, is a business that has been declining and, as a result, would require significant investment in order to compete in the competitive social networking space," the company concludes. "AOL is not in a position at this time to further fund and support Bebo in pursuing a turnaround in social networking."

Under the watch of then-parent Time Warner, AOL spent $850 million on the UK-based social network back in March 2008. The site has since fallen from 22 million monthly unique visitors to roughly 14 million today, according to comScore.

The decision followed the conclusion recently reached by several corporate tax experts to the effect that AOL was better off just scrapping Bebo.

"Without getting into any specific facts or companies, it will often be more attractive for a U.S. corporation to simply shut down a subsidiary and claim a deduction for the worthlessness of the stock against ordinary income instead of selling the stock at a distressed price and taking a capital loss, which may only offset capital gains," Bryan Smith, a partner at Perkins Coie, told TechCrunch.

"A sale of Bebo would almost certainly be less attractive," another tax expert, who wished not to be named, told TechCrunch. "If someone were to pay them $100 million for the service, which is optimistic, AOL could still offset the remaining $750 million as a tax loss ... But it could only apply against long-term capital gains, and AOL doesn't have any to offset against ... They'd have to carry that loss forward and hope for future gains to offset it against."

In April, AOL said it was "committed to working quickly to determine if there are any interested parties for Bebo and the company's current expectation is to complete our strategic evaluation by the end of May 2010."