PE Wants AOL & Other Lies We Keep Telling Ourselves

Private equity may not be the last great hope for AOL. In fact, it may be no hope at all.

According to a story last week from Bloomberg News, buying AOL would be a cheap way for a PE firm to get online. AOL could sell for about $1.5 billion, according to an analyst cited in the story. Such an amount would be in line with the 41% premium paid in takeovers greater than $500 million.

The story didn’t name any PE firms that are or would be interested in AOL. But several analysts touted the company as a good deal that PE should be interested in buying. AOL has posted almost $800 million in net losses in less than two years as a standalone company, Bloomberg said. The access business is expected to generate about $1.5 billion in EBITDA from 2011 to 2013, Bloomberg said. Cash flow from the unit may be enough to pay off any acquisition within three years, the story said.

So I asked some of my sources, both PE execs and bankers, what they thought. One banker said they believed AOL would be interesting for PE (of course), while another banker they couldn’t see any justification for buying the company.

Buyout execs were much less positive. “Who would want to do that deal?” said one PE exec when asked about a possible AOL bid. “That’s in the ‘Life is Too Short’ category.”

“[AOL] is going through major changes and private equity doesn’t like to buy-in when there is transition or turmoil in a company,” another said.

“The whole thing looks too big,” said a third PE exec. “It would have to be a ballsy bet that AOL would provide some form of (cheap) launch pad for a renewed shot at social media.”

A fourth PE exec agrees with reports saying that AOL is worth more in pieces than as a whole. AOL should sell or spin-off its dialup business and shutdown money losing ventures like Patch, the exec said. The company should also stop using money for acquisitions or share repurchases, the exec said. Eliminating money-losing services like Patch would free up $160 million and lift AOL to profitability, the New York Times said.

But in whatever deal, current AOL management would need to be jettisoned, the fourth PE exec said. “Combined there’s enough interesting, badly managed assets [at AOL] that a new CEO could have a field day,” the person said.

However, none of the PE execs said they would consider buying or even looking at AOL themselves. The first PE exec discounted any profit from AOL’s ISP unit. The decline in that business “is going to be inexorable,” the source said.

And the third buyout exec said he wouldn’t look at AOL even if it was split up. The company has no growth, the exec says. “It could be run for cash and probably last a little while,” he said.

The major problem PE has with AOL? No one has figured out how to make an online content business successful, the first PE exec said. All the successful properties, like the Wall Street Journal, the New York Times, CNN, or the Financial Times, have strong offline presences in TV or print, etc, the exec says. AOL has the Huffington Post, which it acquired earlier this year for $315 million, and TechCrunch. However, the company doesn’t have much “destination” content, the source said.

To buy AOL, a PE firm would have to pay some sort of a premium and then go through the “pain and agony” of taking the company private, the exec said. “Not a lot of PE firms are dying to do this, because it would just be very hard. It’s not obvious how to make 10x your money in this deal.”

Any buyer of AOL would need lots of experience in content and that list is short. Some mentioned Providence Equity Partners, which has invested in several media companies like Univision Communications and the Yankees Entertainment and Sports Network, as a possible bidder. Providence is currently investing out of a $12 billion fund and still has money to put to work (today, Providence said it was buying George Little Management for $174 million), sources said. But the buyout shop is also one of the investors trying to exit Hulu. “Providence is very smart,” the first PE exec said. “But they need [AOL] like they need a hole in their head. All of their LPs would remember this one.”

Others pointed to Elevation Partners, which acquired a minority stake in Forbes magazine in 2006, as possibly interested in AOL. Recently, Fortune magazine reported that Forbes went into technical default on some $90 million worth of revolving credit. This required the Forbes family and Elevation to begin an emergency restructuring plan and even hiring Alvarez & Marsal.

“I don’t think [Elevation] is very happy with Forbes,” the first PE exec said.