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As I sat around thinking of the moaning and groaning I've been reading here, not to mention the outright silliness of some of the posts, I thought to do an exercise to figure out how much this company is really worth.

There are lots of ways to do that, of course. One is to look at the share price, although apparently that doesn't mean much if a diminution in 'value' can be 80% in two years for a substantially unchanged company. Another is to conduct many hydra headed mathematical analyses on EBIDTA and cash flow and profits and such, but that hasn't worked too well either, possibly because the market isn't sure what any of those mean anymore, or perhaps because this company just has too many components which are evaluated in different ways, and it's just too damn confusing.

So I decided to try "What would a willing buyer pay for the various pieces of the company?" I had some luck doing this a few years ago when I worked in broadcasting, figuring out what my CBS (now Viacom) was worth, and when I found that I could "break up" the company and sell each individual radio and television station for about $40 a share when the stock was valued at $20, I thought maybe it was a decent time to hold on.

A caveat or two before I start. I'm not a willing buyer; heck, I'm not even in the business anymore so I'm relying on what other willing buyers say they want to pay. The comparisons are probably not perfect. Some of the "comparison companies" have stuff the AOL Time Warner division doesn't have, or don't have what the AOL division does have, or vice versa twice. I may have missed some things. This is strictly "back-of-the-envelope", so take it for what it's worth. As usual, if you have any corrections or additions, feel free.

Cable Systems

There is a lot of talk right now about cable systems. Comcast buying AT&T Broadband, Adelphia and/or Cox possibly being acquired or acquiring systems, and so forth. Adelphia is the #6 operator, and is said to be worth around $9.5 billion, or $4,000 per sub. AT&T Broadband is the #1 operator, and is being absorbed by Comcast for around $4,400 per sub; around $60 billion.

Time Warner Cable is the #2 operator, with 13 million subscribers, giving it an imputed value of $52 billion, plus or minus. However we also know that 2.3 million of the subs in the TWX partnership are actually "owned" by Advance/Newhouse, which could withdraw them from the partnership. So I'll take out their full value, even though they do exist at the moment. Minus 10 billion, makes the cable division "worth" $42 billion. However it's also a partnership with AT&T (Comcast), which owns 25.5%. Making AOL's component worth a total of $30 billion.

Warner Music

The music division is wholly owned, which should make it easier. However there aren't that many music companies around and they don't sell very often. But just as the AOL/Time Warner merger was being contemplated, they announced intention to merge EMI with Warner Music in what was described as a 50:50 venture, which the music press valued at around $25 billion. That would make Warner Music 'worth' around $12.5 billion. However that was also two years ago, and I'm going to discount the number by 25-30% for "froth" and "Kentucky Windage". Don't ask where I came up with the number, it's a mystery to me, too. Recalculated value:: $9 billion.

Cable Networks

Cable networks are an important part of the company. ABC just bought the Fox Family Channel for $5.3 billion, and they paid that little because it was losing money, had spotty distribution and no ratings. Another example: Viacom recently purchased BET for around $2 billion. That channel has about half the distribution of most "big" channels, and is targeted to an ethnic audience and is unlikely to get carriage comparable to "mass appeal" channels. (It has about 40 million distribution, the big fellas get 80 million. The mass appeal channels also get more desirable income levels and subscriber values, no offense.)

Analyzing the Time Warner "networks" gets a little dicey because some are owned outright, and some are held in the TWE partnership. The Turner Broadcasting System owns its networks in toto: CNN, Headline News, TCM, TNT, Cartoon, HBO, Cinemax, and TBS. Cable networks make their money in two revenue streams: from fees paid by cable operators and from advertising. The bigger the distribution, presumably, the bigger the both, therefore I'm going to give a decent valuation to the big guys on the theory that a) they already profitable b) their brand is solid and c) they have decent ratings which augers well assuming advertising rebounds sometime.
CNN: $8 billion.
CNN/SI, CNN/fn, CNN/International, CNN en Espanol: nothing.
CNN Headline News: $5 billion.
TBS: $7 billion.
TNT: $7 billion.
Cartoon: $7 billion.
TCM (no advertising): $3.5 billion

HBO & Cinemax are harder. They have 40 million subs but carry no advertising. The cable company rakes off part of the subscription fee, but it looks as though they gross north of $2 billion a year. On a sales multiple of just 5x, that would make HBO & Cinemax combined worth $10 billion or so. That's a SWAG.

In the TWE partnership, they own 50% of Comedy and 50% of Court TV, together worth, maybe $7 billion, giving AOL $3.5 billion, minus the 25% partnership interest, a grand total of $2.6 billion.

They also own the WB network, which is a toughie. It's not profitable and is wholly dependent on advertising. Tribune owns around 25%, and AOL owns around 75% in TWE, which means they really own around 56% of it. Still, if Mel Karmazin wants Viacom to hold on to the even less successful UPN, the WB must be worth something.. Dunno. I'll give it zero.

Warner Brothers Filmed Entertainment

They own a movie studio that's doing pretty well. It was #1 last year, probably going to do OK in the near term. Harry Potter, Lord of the Rings, that sort of thing, you've heard? MGM was rumored to be for sale for $7 billion a couple of years ago, but nobody bought. Of course MGM is probably the weakest sister of the majors and part of its library was already gone, but maybe the price was too high. Let's guess it might have moved at $5 billion, and that Warner Brothers is worth more. Maybe $7 billion, maybe not. The Warner Brothers studio is owned through the TWE partnership, which means the AOL portion is worth $5 billion.

The company also owns some film and video production outright, such as New Line Cinema and Turner Productions, as well as film and cartoon libraries which they use themselves, and sell to other people. I can't put a number to it, but it's also worth something. Another zero for now.

Publishing and Books

Then there's the Publishing division. They publish 64 magazines, the best known of which are Time, Sports Illustrated, People, and Fortune. In this division is also Book publishing and some various other stuff, who knows what all? I'm unable to find anything comparable, so this will be a really big question mark. It's worth noting, however, that this division also lives on subscriptions as well as advertising, and that subscriptions are strong. In fact, with 49 million, it has more than HBO and Cinemax combined (40 million), more than AOL, RoadRunner and CompuServe combined (35 million), and far more than cable subscribers (13 million.) The dollars-per-subscriber are also less, however. Time Warner paid $500 million for the Times Mirror magazines a couple years back, but then Popular Science is not exactly Time Magazine, and Field and Stream isn't exactly Sports Illustrated either. Let's guess that the whole shebang is worth $10 billion. That's more than a guess, it's a number from the cosmos. Any help firming it up would be greatly appreciated.

Stuff I Left Out

OK, so we're at a total of $104 billion to buy this media laundry list. Perfectionists might note that I've left a lot of stuff out which I noted, and others will say "Hey, there's more", like the Atlanta Braves, Atlanta Hawks (owned by Turner Networks), silly stuff like the local news channels running on Time Warner cable systems (NY1, Orlando, etc.), the television production arm which produces such shows as ER, West Wing, Drew Carey, Friends, and the partnership with Telepictures which has such shows as Rosie and Jenny Jones.Warner Brothers animation owns a lot of Looney Tunes, the Hanna-Barbera library, and the brands from TBS' and DC Comics libraries, not to mention 50% of DC Comics itself. There's a Warner Brother Consumer Products Division which licenses images and uses to manufacturers for everything from Harry Potter merchandise to the DC Comics Superhero stuff. They also own Mad Magazine, for you Alfred E. Newman fans.

The network division also owns Turner South, a regional cable network and Boomerang, a digital cartoon network. There's also a bunch of other crap, like CNN+ for Spanish viewers in Spain and Andorra, CNN Turk, n-tv (a German language news network, partial ownership), Cartoon Network Japan, and so forth. HBO also has separately branded services in Japan, Asia, South America and Europe."Everybody Loves Raymond" is produced by HBO Productions, and TVKO has a nice business providing pay-per-view prize fights and other PPV programming for cable and satellite distribution, so there's some production and distribution which isn't captured in the "networks" per se.

I've already ignored the value of the WB Television network above, so skip it. The purchase of Word Records (Christian) came after the EMI valuation example up top, but I'll ignore that, too, along with the Publishing division which owns Warner/Chappel, which in turn owns CPP/Belwin, a name you sheet music fans have undoubtedly seen many times. I think it's the biggest in the business, but I'll give it zero since I have no clue how to put a number to it.

In 2000, the company acquired 23 magazines from Times Mirror including Popular Science, Field and Stream, Golf, Ski, Skiing, Yachting, and a bunch of other specialty stuff. They also have Entertainment Weekly and a bunch of titles from Southern Progress including Southern Living, This Old House, Cooking Light and about 10 others.

There's the Book-of-the-Month club, some record clubs, and anyone who watches television in the middle of the night can't help but see the endless repackages of music of the 60's (70's, 80's), jazz, Christian, Nat King Cole, and every other permutation and combination offered by Time Warner music.

Company Debt

The latest Hoover's gives the company's long and short term debt at roughly $23 billion. (They also list "liabilities" at something above $50 billion, but then I'm not including "assets" like receivables and the like either, so I'm ignoring that. You may not want to.) I haven't added (subtracted) the $10 billion the company will likely pay to Comcast to extract itself from the TWE partnership, as I discounted that value in the first place. That makes the grand grand grand total value of the company $104 billion minus $23 billion, or $81 billion.

There are 4.2 billion shares outstanding, making each share "worth" around $19.28 each.

Oh, I left this out too

Sharp eyed readers who have persevered this far will notice that I've left out one division of the company. It's that "on-line" part, the one which bought all this other stuff with its high priced stock, the one they use as the ticker symbol. The one at the top of this page. That's right: AOL.

At $19.28 per share, I'm giving "AOL" a value of zero. Nothing. Nothing for CompuServe, RoadRunner, Netscape, ICQ, IM, MovieFone, Mapquest, Digital City. Nothing for any websites they manage, nothing for their subscription revenues of $700 million a month, nothing for their woefully lamented advertising revenue of $100 million a month, nothing for being the world's largest ISP, nothing for (money losing) AOL Europe, nothing for nothing.


Does that seem appropriate? With all its confusing problems, regulatory obstacles, looming debt, goodwill write downs, does it seem likely to you that this company is worth $19 per share, and that AOL, the profitable on-line service is worth zero?

I'm open to opinions, but mine is that the market has overreacted and eventually will correct. That may take some time, but I can wait.
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