Shift Success Depends on Breakup Values

After years of preaching synergy, the powers-that-be at InterActiveCorp and Time Warner are conceding that some of their core assets will be worth more as stand-alone sales or public spin-offs than they have been in their woefully undervalued portfolios. IAC chairman and CEO Barry Diller and newly named Time Warner CEO Jeff Bewkes will jettison select operations in a last-ditch bid for elusive value, which will be determined by other individuals, companies and markets. And that's the rub. There is no guarantee that simply breaking up the parts creates new or additional value.

Given these volatile times, it is difficult to know how investor markets will value the initial or sustained price of media and Internet properties, considering the tumultuous external factors at work. For instance, AOL acquired Time Warner in 2000, was unceremoniously removed from the corporate moniker last year, and has fallen on hard times in its quest to change from a subscription-based to an advertising-based portal. While it is virtually being handed free to investors as part of Time Warner's underwhelming $18-a-share stock price, AOL may not be able to muster more than a low double-digit valuation on its own. The options include selling off AOL's subscription-based dial-up access business, spinning off AOL into a publicly traded company, or selling it outright.



In one interesting scenario, AOL could become the focus of a bidding war between Diller and Microsoft, either of which could make constructive use of the Internet brand. Diller's restructured IAC will be a portfolio of Internet companies for which AOL would be a good fit.

Likewise, IAC's Home Shopping Network would be a natural fit for Liberty Media's QVC, a merger of which would create a dominant television shopping entity that is struggling to transfer its recognized clout to the Internet. Liberty Chairman John Malone, a tough negotiator and stickler for avoiding taxes, nixed a merger of the shopping giants earlier this year on weakening HSN fundamentals. Under the spin-off plan, Diller could make a tax-free swap of HSN (with a market cap of $2.5 billion) in exchange for Liberty's 24% economic stake, currently valued at more than $2 billion. Malone--an IAC board member with 60% voting control--favored of the split, which gives HSN an indisputable public value as well as a potential $1 billion premium for the synergies that could be realized if it merged with QVC. For the moment, at least, it looks like Diller has won the current round of "Gotcha" with his long-time nemesis Malone. But, as with everything in these corporate breakups, the devil will be in the details.

Clearly, the breakup of IAC (with an overall market value of about $10 billion) into five publicly traded companies is a prelude to selling some, if not all, of the four newly created stand-alone entities.

The successful public spin-off of Expedia several years ago may bode well for (with an estimated market cap of $340 million), Ticketmaster (with an estimated market cap of nearly $3 billion), travel-related Interval (with a market cap of $534 million) and HSN. Although it does not necessarily reflect where these new spun-off entities will trade, Bernstein Research analyst Jeffrey Lindsay estimates that the proposed pieces of IAC contribute to the company's $35.06-a-share target price as follows: The new IAC $14.52, Ticketmaster $9.65, HSN $8.03, Interval $1.75 and mortgage-exposed Lendingtree $1.11.

"The de-conglomerate sale does not make the pieces any more valuable by themselves," observed RBC Capital Markets analyst Jordan Rohan, who has assigned a $7-a-share value to IAC's retail businesses (including HSN), $10 to Ticketmaster, $5 to Interval, zero value to Lendingtree, and $8 for all other assets including the media businesses such as Even some of those lukewarm estimates are generous. For instance, Ticketmaster's value will be reduced to $3 a share when it loses its LiveNation business in 2009, Rohan notes. Diller is hoping to more effectively pursue IAC's long-held mission "to harness the power of interactivity to make daily life easier and more productive for people all over the world" with the streamlined IAC, which will benefit from Internet growth rates and an Internet multiple. The new IAC--with an estimated $4.5 billion market cap and most of $1.8 billion in cash--will be buoyed by, CitySearch, Bloglines,, IAC Advertising Solutions and several dozen other online properties, as well as its investments in the likes of The new IAC will focus more squarely on online search and content businesses, including the recently revamped, fourth-ranked search engine, which even with nearly half a billion in annual revenues has not budged far off the $1.9 billion IAC paid for it in 2005.

Although IAC stock has been inching back up toward the $30-a-share mark on the split-up news, having lost about 30% of its value this year, the jury is out on unlocking the value of its pieces until after the spinoffs are executed in mid-2008. The improving trends reflected in IAC's third-quarter earnings and the $3.5 billion-plus in revenues that will be generated from's extended five-year search contract will boost the combined company's fortunes in the meantime.

Still, the most notable intangible value of the split scenario would be bringing an end to Malone's bullying tactics at IAC and freeing Diller to engage in more enterprising pursuits, including the mobile application of his Internet brands and the fast-emerging online gaming business.

Likewise, the notion that Bewkes and his crack Time Warner team would be free to pursue growth creation with a few choice assets is a worthy bottom-line objective at the $80 billion conglomerate--which also has wrestled with size, synergy and strategy for nearly a decade. Media, entertainment and Internet players have demonstrated time and again that enterprising management and innovative development are key to growing businesses. It's not enough to simply place choice assets on automatic pilot, as we have witnessed with some cable system operators. In the case of Time Warner Cable, Pali Research analyst Richard Greenfield expressed the frustration shared by many of his peers when he lowered his estimates to below the company's own guidance last month. "Hard to believe that a company that had two years to prepare for an integration of Adelphia and whose top-end of guidance was originally viewed by investors as overly conservative is now likely to miss expectations."

Greenfield also says social networking, branded content providers making it without Web portals and the monopoly of Google search are gnawing away at what's left of AOL's value--now dependent on growing ad revenues off of a shrinking 10 million subscriber base. The point is, by the time Time Warner chooses to make any value-creation move with AOL, it will be worth far less than when they merged. In a recent sum-of-parts valuation based on earnings, UBS analysts Michael Morris and Matthieu Coppet assigned AOL a $13 billion valuation, Time Warner Cable a $46 billion valuation, filmed entertainment $10.5 billion, the cable networks $36 billion, and Time Inc. publishing $8 billion for a total consolidated valuation of $114 billion. Although the company's "positive investment thesis increasingly reliant on transaction potential rather than on core business development," Bewkes could ignite new creative and collaborative processes to drive long-term growth once asset sales and reshuffling is completed more than a year from now, the analysts say.

In fact, this is just the tip of a breakup trend that will tear through many other media, entertainment and Internet companies over the next year to create more manageable, finely tuned pure-play businesses to better participate in the digital boom. But if CBS--spun off from Viacom several years ago--is any indication, not all of the split-off scenarios will play out as planned, since the assigning of values continues to be the unpredictable business of investors and buyers.

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