AOL Time Warner is set to swallow another multibillion-dollar writedown by the end of the year.
It would be the second gigantic writedown for the beleaguered media giant, and another stark reminder of the failure of the mega-merger of AOL and Time Warner to live up to its billing.
Industry observers expect the writedown for goodwill – which is the amount a company pays for an asset above its value – to be “well into the billions,” in the words of Tom Wolzien, an analyst at Sanford Bernstein.
Another industry source said the amount is expected to be between $20 billion and $30 billion. This would be in addition to a massive $54 billion writeoff the company took previously to comply with new accounting rules on goodwill.
AOL Time Warner currently has about $34 billion worth of goodwill on its books at the online unit. It also took a relatively small writeoff – $733 million – in its recently completed third quarter to reflect a decline in value of certain investments, including Hughes Electronics, AOL Latin America and Time Warner Telecom. This brought the total amount of writedowns for investments this year to $1.7 billion. This is up from $821 million in investment writedowns in the same period last year.
The large writedowns reflect the declining value of the company. When the merger was announced in 2000, the deal was valued at $165 billion. By the time it closed in January 2001, however, the value had dwindled to $110 billion. Now, based on current stock prices, the market values the company at about $66 billion.
Despite the prospect of a large writeoff hovering over the company, AOL Time Warner stock rallied yesterday and closed up $1.02, or 7.5 percent, at $14.55.
“It’s an admission that they bought something for too much with inflated stock,” said Scott Reamer, a hedge fund manager who runs Union Tree Capital, of the writedown. “But people know that. It’s meaningless for the stock price. These are non-cash items. What people are worried about are cash items.”
An AOL spokesman declined to comment on the size of the writedown, but the company said in its earnings release Wednesday that due to the company’s falling market value, shaky performance at the AOL online unit and a weak market for the cable industry, the company expects to take a “substantial” writedown.
The company said further writedowns would not affect the company’s liquidity or debt covenants, since the writeoff would be non-cash. The company’s covenants stipulate that it must maintain at least $50 billion of net worth. It’s current book value is $97 billion.
“It would not affect their covenants, they say, and I’m willing to take them on face value,” said Wolzien. “But it’s a huge number, and will get a lot of attention.”
The writeoff will likely trigger the ratings agencies to lower ratings on the company’s debt, which would raise the company’s borrowing costs, said another investor source.
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AOL TW (WRITE)DOWN
Since the merger in January 2000, the stock of the combined company has lost 77 percent.
JAN. 10, 2000: $63.25
OCT. 24, 2002: $14.55