AOL Time Warner is fit to be tied.
With its stock price, executive ranks and recovery under siege, AOL Time Warner is desperately searching for ways to create a positive spin. But that may still be a ways off, given the controversy and record-low prices plaguing all cable stocks.
In the past week alone, the company has been dogged by negative analyst reports and persistent rumors about the defection of Chief Operating Officer Bob Pittman.
AOL Time Warner and The Walt Disney Co. both denied renewed speculation that Disney Chairman Michael Eisner is wooing Mr. Pittman to be his successor. The rumor, floated in the Drudge Report, served to remind investors of the leadership unrest at both media giants.
Countering newly revised analyst estimates at a June 5 Deutsche Bank Securities investors conference, AOL Time Warner Chief Financial Officer Wayne Pace reaffirmed the company’s modest guidance that its beleaguered America Online unit will post $1.8 billion to $2.2 billion in advertising revenues in 2002. He also reiterated the company’s full-year overall guidance of 5 percent to 9 percent cash flow growth on 5 percent to 8 percent revenue growth.
A day earlier, Lehman Brothers analyst Holly Becker lowered her earnings estimates for the media company, saying “AOL will have a more sustained downturn in online advertising” and that a potential turnaround will come later than originally thought.
That and other news last week collectively pounded AOL Time Warner stock, which fell to a post-merger low of $16.21 a share June 6, its lowest point since November 1998, giving the company a market capitalization of about $74 billion. That means Viacom, valued at about $87 billion, has breezed past AOL Time Warner to be the largest valued media company, even though AOL Time Warner’s annual revenues remain greater.
It didn’t help that cable company stocks in general, battered over the past year, also were down. Cablevision Systems hit a new four-year low at $16.08 a share; Charter Communications hit a new low since going public in November 1999 of $5.31 a share; and Cox Communications hit a three-year low of $31.22 a share.
The silver lining: “These stocks will be the first to turn when the industry multiples bottom,” said Thomas Weisel Partners analyst Ray Schleinkofer.
However, things could get worse before they get better. Jeffries analyst Fred Moran told clients Friday he expects AOL Time Warner’s second-quarter earnings results, due around July 24, to be “comparably soft to those reported for the first quarter, with flat overall cash flow growth.” Mr. Moran, who lowered his price target on the company to $25 a share from $30 a share, said he believes the stock “has likely bottomed.”
He also expects the America Online unit to “exhibit further weakness due to the poor online advertising market and seasonally soft subscriber gains.”
AOL Time Warner also continues to be hurt by the absence of clear signs of restructuring and rejuvenation at the AOL unit under Mr. Pittman’s renewed leadership and by the lack of resolution of the dismantling of its troubled Time Warner Entertainment partnership. The Newhouse partners are expected to withdraw their 2 million cable subscribers from the venture in the coming months, further diluting Time Warner Cable’s efforts. Newhouse represents one-third of TWE, which is valued at about $8.4 billion. Unraveling the remainder of TWE has been complicated by the sale of AT&T Broadband to Comcast Corp. Negotiations continue.
Adding to the confusion was a disclosure that AOL Time Warner Vice Chairman Ted Turner, AOL Time Warner’s largest individual shareholder, plans to regularly sell small portions of his stake to fund his many charitable interests, causing more investor concern. Earlier in the week, a Vanity Fair article reported that an angry outburst by Mr. Turner during an AOL Time Warner board meeting late last year heavily contributed to the abrupt retirement of Gerald Levin.
Although AOL Time Warner spokespersons say the story is “not factual,” others close to the company say Mr. Turner did strongly challenge Mr. Levin’s leadership during the meeting. However, sources said it would take more than Mr. Turner’s loud complaining and the corporate unrest widely speculated upon to lead to Mr. Levin’s recent departure as CEO.
But clearly, AOL Time Warner and other cable companies are being negatively impacted by each other’s bad news.
Adelphia Communications, which is soon expected to file for bankruptcy, has raised concern about other family-run cable companies. Adding to the company’s devastating woes, it appears its reported cash flow will be thrown way off by disclosures Friday that Adelphia management inflated its reported subscriber numbers by 10 percent. The Wall Street Journal reported that management maintained two sets of accounting books, further underscoring accounting practices being investigated by two grand juries, the Securities and Exchange Commission, federal prosecutors and investor lawyers.
The company continues to explore ways to sell cable systems in Los Angeles and elsewhere to pay off debt. Charter Communications has broken off negotiations to buy some of those systems over vast differences in price. However, Adelphia only has enough cash to operate for several more weeks before more dramatic action must be taken. Members of the founding Rigas family have resigned their positions and control of the company as a result of the $2.3 billion in loans and complex business deals they allegedly conducted using Adelphia as collateral.