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AOL TIME WARNER’S GOT Q1 PREVIEW
Merrill Lynch Maintains Intermediate “Neutral” Rating
Being the world’s largest media conglomerate ain’t easy.

That’s the gist of AOL Time Warner’s upcoming first-quarter earnings report, according to an analyst report led by Merrill Lynch VP Jessica Reif Cohen. The ML crew estimates that AOLTW revenue will advance slightly to $9.4 billion for the quarter (versus $9.3 billion last year), while EBITDA will remain flat at $1.9 billion.

Earnings per share will likely come in at $0.08, compared to $0.16 a year ago—a decline of 52 percent.

While Cohen and staff maintain a “Strong Buy” rating on the company for the long term, they maintain their intermediate “Neutral” rating (first downgraded from “Buy” last October) due to a number of challenges facing AOLTW, which they think will make near-term growth difficult.

These challenges have to do mainly with the company’s cable operations, which, of course, are now critical to the deployment of AOL’s new broadband services. Potential changes in the ownership structure of cable assets, as well as other liabilities, could add up to a $750 million hit to AOLTW’s EBITDA and stress the company’s credit facility to the tune of $20 billion or more.

Time Warner Entertainment’s partnership with Advance Newhouse in about 7 million subscribers’ worth of cable networks has matured, meaning AN could opt to dissolve it either by selling its stake, valued at upwards of $11 billion, to TWE or walking with its share of the partnership’s assets. That means TWE either coughs up or faces operating on a smaller scale at a time when that just isn’t done.

Another problem is the possibility that AT&T Comcast (when merged) may call for TWE to buy it out of its minority stake in TWE for roughly $10 billion. That, combined with other liabilities involving money owed Vivendi for AOL Europe and the possible buyout of the 20 percent of the Road Runner broadband network AOLTW doesn’t already own could put the squeeze on the company’s resources and affect near-term cash flow, the ML report says.

The “next leg of growth” for AOLTW will be “driven by a combination of broadband subscribers, the sale of new services (e.g. subscription music services) as well as international growth,” most of which isn’t expected to happen for years, Cohen and staff write. They consider the roll-out of AOL Broadband on Time Warner cable systems “both a strategic imperative and crucial driver of growth.”

Speaking of music, subscription or not, Q1 EBITDA is expected to slide 4 percent to $90 million, compared to last year’s already soft first quarter of $94 million. Revenue is expected to decline 3% to $850 million versus $873 million last year.

Gosh, numbers are neat. How’s that for a “forward-looking statement”?

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