The Day Ahead: AOL Time Warner campaign under way

The dynamic duo stump for open access, but only to please regulators
Written by Larry Dignan, Contributor on

There's a big campaign going on, and we're not talking Bush versus McCain. It's more like the AOL Time Warner "buy into our merger" campaign, and officials are hitting the road to sell their marriage to regulators and Wall Street.

Now it's time to see who buys it. So far, Washington and Wall Street has been a bit skeptical about the dynamic duo. Tuesday's open access pledge could potentially be a big deal as AOL Time Warner allows other Internet service providers (ISPs) to use Time Warner's cable assets. The whole open access flap revolves around whether consumers will get choice when it comes to broadband services. AOL needed cable access, so it bought Time Warner. You don't think AOL bought Time Warner for rights to Bugs Bunny do you?

AOL Time Warner preached the message of consumer choice and Internet service diversity, but let's not kid ourselves -- it wouldn't have stumped for open access if it didn't have to please regulators. Deep down, the company may really love the idea of open access, but the timing of the whole announcement indicates that AOL Time Warner needed to warm up regulators.

AOL Time Warner chieftains, Steve Case and Gerald Levin, met with the Senate Judiciary Committee just hours after the open access pledge was made public. Of course, the company said the open access memorandum of understanding was just the first step in a series of moves. Tuesday's plan was just a framework. More details will follow as AOL Time Warner ponders an existing agreement with the Roadrunner broadband service and other upcoming deals. In any case, AOL Time Warner will make money, because nothing is free, and the access to its pipes won't be cheap.

But AOL Time Warner's open access position paper was a nice bit of theatre as it campaigns for its merger and all of its broadband splendor. And it's not just Washington where the AOL Time Warner campaign is underway -- the tour has also been making the rounds on Wall Street.

AOL needs to get Wall Street excited. Analysts have kept quiet on the merger because of the difficulty in valuing the new company. Metrics for AOL, a fast-growing Internet company, don't mesh with Time Warner, a media conglomerate. You'll either get a high growth, Internet-fueled media empire or a slow growth dud. However, analysts have recently been coming around on the deal. Either Wall Street's pundits arrived at the same conclusion at once or there's a serious education process going on behind the scenes. Our guess is that AOL Time Warner is rallying Wall Street, too.

Exhibit one, 23 February: After AOL shares slumped to the $50 (£31) mark, Merrill Lynch Internet analyst Henry Blodget stopped the bleeding with a report dubbed "You've Got Upside!". Blodget and Time Warner analyst Jessica Reif Cohen were bullish on AOL and called the stock undervalued by almost any measure.

The Merrill duo said there's little downside risk to AOL shares. "Buy up Time Warner, too," they said. Shares may not move much as "investors develop a framework for understanding and evaluating the merger", but brand and synergy will be king.

We're not sure what AOL Time Warner sent Merrill Lynch, but it worked.

Exhibit two, 24 February: CS First Boston analyst Lise Buyer upgraded AOL to a "strong buy" from a "buy" rating. In a report, Buyer said AOL as a standalone business could support a current value of $66 (£40) a share, and when AOL and Time Warner are combined it should support a price between $88 and $97 (£54 to £60). The projections were based on management guidance of a $40bn (£24bn) entity generating $10.5 to $11bn (£6.5 to £6.8bn) in earnings before interest, taxes, depreciation and amortisation.

Exhibit three, 28 February: Robertson Stephens analyst Michael Graham reiterated a "strong buy" rating on AOL. It is time to "re-engage on AOL stock" because shares have been beat up "for a couple of reasons, which appear on the brink of being resolved in the market".

"We have encountered a 'dead money until the merger closes' mentality, which we believe could quickly give way to a 'how high is up' mentality," he said.

Not to be left out, Credit Lyonnais set a one-year $102 (£63) price target on Time Warner, and said it rates AOL shares a "buy" at $57 (£35) and lower, with $68 (£42) being a fair valuation based on 2001 earnings estimates.

And there are many more analysts to be sold on the merger. The AOL Time Warner campaign is just beginning.

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