Google likely to stay put on AOL stake

By Kenneth Li - Analysis

NEW YORK (Reuters) - Starting today, Google Inc (GOOG.O), which has a 5 percent stake in Time Warner Inc's (TWX.N) AOL, has the right to force the media conglomerate to bring its Internet division to the market.

But Time Warner investors should not hold their breath if they think this is an opportunity for the media company to finally rid itself of the legacy of its disastrous 2001 Internet merger, once hailed as the deal of the century.

A clause in Google's 2005 purchase agreement for the AOL stake gives the Web search leader the right, but not the obligation, to force a public offering of the shares or a repurchase at fair market value beginning July 1, 2008.

But at current market valuations, Google stands to lose an estimated $500 million if AOL is taken to market, analysts estimate. AOL's $20 billion valuation, established at the time by Google's $1 billion investment, has been cut by half to as low as $10 billion by some projections.

"Under the current market and strategic conditions, Google is unlikely to rock the boat," Bernstein Research analyst Jeffrey Lindsay said.

Analysts and investors also say Google is enjoying an estimated $70 million to $80 million it gets annually from AOL by providing search advertising services, and is unlikely to want to risk AOL taking its business to rivals.

The July 1 date was viewed months ago as a catalyst for Time Warner's board to speed up discussions to spin off or sell AOL to any interested party, including Yahoo Inc (YHOO.O), Microsoft Corp (MSFT.O) or News Corp NWSa.N.

That is because a similar scenario played out when Comcast Corp (CMCSA.O) sought to resolve its 21 percent stake in Time Warner Cable (TWC.N) in 2003. The two agreed to buy and divvy up the assets of bankrupt cable operator Adelphia, and the deal eventually led to the partial spin-off of Time Warner Cable.