Markets & Stocks
What are AOL, Disney really worth?
What would the parts of AOL Time Warner and Disney be worth on a standalone basis?
January 31, 2003: 9:54 AM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Is the sum of the parts at troubled media titans AOL Time Warner and Walt Disney worth more than the whole?

It's a question worth asking given the companies' myriad woes. AOL Time Warner reported a record corporate loss Wednesday and management gave little hope for a rebound in 2003 (see more). AOL Time Warner is the parent company of CNN/Money.

Disney reported its latest quarterly results Thursday. Profits, excluding one-time items, rose 13 percent and beat analysts' expectations. But net income fell. The company has suffered in recent months due to declining attendance at its theme parks as well as from some high-profile movie flops -- most notably the animated film "Treasure Planet."

Both stocks have been pummeled during the past year, with AOL's shares plunging 55 percent (including a 14 percent drubbing Thursday) and Disney falling more than 20 percent.

But according to two analysts, the value of each company's divisions adds up to significantly more than their current share prices. CNN/Money came up with an average estimated breakup value for both companies based on research by A.G. Edwards analyst Michael Kupinski and Guzman & Co. analyst David Joyce.

Both analysts used profit targets to estimate what prospective buyers would pay for each division on a standalone basis. So the $15.2 billion value for the AOL division is based on an average 2003 earnings before interest, taxes, depreciation and amortization (EBITDA) estimate of $1.5 billion and a multiple of 10 times that.

But the valuations for some businesses are higher than others. For example, a buyer would probably pay a higher multiple for Disney's television business, which includes the successful ESPN network, than for the theme parks.

For AOL Time Warner (AOL: down $0.19 to $11.81, Research, Estimates), the value (after adjusting for the company's $25 billion in debt) turned out to be $21.14 a share, more than 75 percent higher than the company's recent stock price.

Disney's (DIS: up $0.65 to $17.00, Research, Estimates) breakup value came out to $23.19, about a 40 percent premium to current levels. The Disney price factored out its nearly $12 billion in debt.

Just one measure

So does this mean that both AOL Time Warner and Walt Disney are screaming buys? Not necessarily, say both analysts.

Joyce says the breakup values are only useful for looking at what a company might be worth if it were to sell off all its divisions separately -- not a viable scenario for either company. (Joyce does not own shares of AOL or Disney, and his firm has no investment banking relationship with Disney. Guzman & Co. has served as an underwriter for an AOL Time Warner bond offering in the past 12 months.)

However, the Wall Street Journal reported Friday that senior executives are debating the sale of assets such as Warner Music. The company would not comment on rumors of asset sales except to say that it is looking to sell its book division. It also plans on selling a minority of its cable business through an initial public offering but would retain control of the unit.

The New York Daily News reported Friday Ted Turner, the company's largest individual shareholder who announced this week he would give up his vice chairman title at the company, was interested in a bid for either the Atlanta Braves or the entire corporation. A company spokeswoman would not comment on the report.

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Michael Kupinski, media analyst at A.G. Edwards, gives his perspective on AOL Time Warner.

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The paper quoted Turner biographer Porter Bibb as saying Turner is talking to people about backing a bid for the overall company. The paper also said there were reports he might be interested in CNN. Turner founded CNN and owned the Braves before selling his media company to Time Warner in 1996. But the report also quoted CNN anchor Lou Dobbs saying he doubted Turner has interest in the company. "Ted has great respect for (AOL Time Warner chairman) Dick Parsons," Dobbs said in the report.

Kupinski also thinks it is incorrect for investors to assume that either company should trade at a price equal to the breakup value of their assets. He says that typically, media companies trade in a range of 50-to-80 percent of their breakup value. (Kupinski does not own either stock and A.G. Edwards has not done any recent investment banking for AOL Time Warner. It has performed underwriting for Disney within the past three years.)

So based on the average breakup values determined by the two analysts, a reasonable range for AOL Time Warner would actually be between $10.60 (below the current stock price) and about $16.90. And Disney would trade at a price ranging from $11.60 to $18.55.

Related stories
AOL considers shedding assets
Time Warner Cable IPO may face rocky road
Ted Turner stepping down
AOL Time Warner reports record loss

What's more, Joyce says his estimate for AOL Time Warner's breakup value could be too generous because it is based on hopes for renewed earnings growth in the high single digits for the AOL division after 2004. He concedes AOL will not be worth such a high multiple unless there is fundamental improvement in the AOL unit in the near future.

In other words, these values are based on the assumption that things are actually going to get better for these media companies. So, if AOL and Disney continue to stumble, their breakup value will obviously be a lot lower than the current estimates.  Top of page

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