AOL mulls breakup, merger with Yahoo

AOL Inc, undergoing a radical transformation into the king of content on the Internet, is actively exploring a breakup involving a complicated series of transactions that may lead to a merger with Yahoo, sources close to the plans told Reuters.
The plans are still in the exploratory stage and fraught with complications involving myriad moving pieces.
In many respects, the latest discussions are derivative of plans contemplated in 2008 and 2009 before Time Warner spun off AOL to Time Warner shareholders.
At the time, the media conglomerate had explored the option of breaking apart AOL's two main businesses. Its legacy dial-up Internet service would have been sold to or spun off into EarthLink or United Online. Its display advertising business would have been merged into Yahoo, the sources said.
To avoid complication and to push ahead with plans to rid itself of a decade-long nightmare, Time Warner spun off AOL rather than face heavy tax liabilities that would have been associated with a break up, said the sources.
AOL has continued to explore a break up option since the December 2009 spin off. "You can drive the pieces into people's hands that could pay top dollar for them and create value, or spin them off," said one of the sources.
This strategy is dependant on the buyers for the parts, including Yahoo and EarthLink, whose directions have changed since Time Warner first considered these plans, said the sources.
EarthLink, for instance, was once a willing and capable buyer of AOL's cash-generating dial-up business. But it has agreed to buy DeltaCom Inc for $516 mln, tying up most of its free cash and is unlikely to pursue another big transaction for now, another source said.
Combining Yahoo and AOL's web properties makes strategic sense, said Todd Rethemeier, analyst at Hudson Square Research. Yahoo's home page attracts audience to its sports, finance, general news and email, while AOL, has strengths in maps, and entertainment news, Rethemeier said.
Yahoo, which is expected to generate $1.64 bln in Ebitda this year, could support AOL's display ad business, giving AOL the confidence to shed the dial up division, a big financial engine at the company.
A source close to Yahoo reiterated that it is not seeking proposals or in any buy-out discussions with AOL.