AOL Deal Chatter in Wall Street's Focus

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Amid talk that the online company led by CEO Tim Armstrong could go private, one analyst says the firm could end up selling its access business.

NEW YORK - Since AOL's recent second-quarter earnings conference call, during which management lowered its full-year outlook, investors seem to have lost patience with the turnaround strategy of CEO Tim Armstrong.

The stock recently hit its lowest point since the separation from Time Warner, and Wall Street observers say that chatter over the past couple of weeks has been that the online company could sell itself or at least parts.

AOL officials confirm that the company regularly holds strategy talks with investment banks that it has on retainer, but it says no deal is on the table or being discussed. 

On Wednesday, the New York Post 
reported that in its talks with its bankers, AOL has explored the topic of going private in a potential deal with a private equity firm. (link) An AOL spokeswoman declined comment, saying the company doesn't comment on rumor and speculation.

Wall Street observers said going private would allow AOL to focus on its turnaround efforts without scrutiny from the stock market, potentially allowing it to be bolder.

Barclays Capital analyst Ronald Josey on Wednesday outlined a different scenario though in a report entitled "Will AOL Go Private? Downside Limited."

 Reiterating his "equal weight" rating and $15 price target on the stock, he said: "We believe AOL could be exploring the potential to sell [its Internet] access [business] and in so doing is working through other options, including a take-private scenario. But given recent open-market buying [of stock] by AOL's board of directors, we believe a full private transaction is not imminent." 

Analysts have in the past suggested a sale of the access portion of AOL could make sense. "
If AOL were to sell its access business, we could envision an approach similar to that of the sale of its German access businesses in 2007 whereby AOL divested its subscriber billing relationships, but retained the right to continue delivering content," said Josey. 

AOL's 3.4 million access subscribers as of mid-year could be worth $850 million, "which could be viewed as conservative" when compared to the market value of such competitors as Earthlink and United Online, he wrote.

While investors are "essentially getting a free call option on AOL's content assets," the analyst maintained his rating on AOL, which is similar to a "neutral," citing increased competition and the hope for revenue benefits from new investments.

As of 3pm ET, AOL's stock was up 2.6 percent at $15.71, giving the company a market value of $1.68 billion.


Twitter: @georgszalai