UPDATE 3-Time Warner to separate AOL near year end

Thu May 28, 2009 12:23pm EDT

* Plans to buy Google's 5 pct AOL stake before separation

* Tax free deal for Time Warner shareholders

* Shares down less than 1 percent (Adds analyst comment, stock move, byline)

By Paul Thomasch

NEW YORK, May 28 (Reuters) - Time Warner Inc (TWX.N) on Thursday made official plans to separate its AOL division sometime around the end of this year, a widely expected move that sheds one of the media company's weakest divisions.

For Time Warner, the move represents a return to its roots as a pure content company with a focus on its cable channels, film studios and publishing businesses and unwinds a massive merger in 2000 that failed to live up to its promise.

The struggling AOL, for its part, will once again be an independent company left to seek its fortunes in an Internet landscape dominated by Google Inc (GOOG.O) and smitten with social networks like Facebook and Twitter.

Time Warner, which for months has signaled such a plan was in the works, said the deal has been approved by the board and would be structured as tax-free to its stockholders. It still needs regulatory approval.

Time Warner recently spun off Time Warner Cable Inc (TWC.N) and is bent on becoming a pure content company that concentrates on brands like CNN, HBO and Warner Bros. Its shares were steady in midday trade, having climbed 40 percent in the last month.

"Overall, we are encouraged by the pace of change at Time Warner and management's move to deconsolidate," Credit Suisse analyst Spencer Wang said in a report.

In the last three years alone, AOL's share of the U.S. search market has dropped from nearly 12 percent to around 4 percent. Its dial-up web access business continues to shrink. And a broader pullback in spending by marketers is hurting its web advertising business, Platform A.

Still, analysts say AOL could find its footing as an independent company under Tim Armstrong, the former Google executive tapped in March to head the company.

Analysts also point out that an independent AOL could pursue a combination with Yahoo Inc (YHOO.O) or Microsoft Corp's MSN (MSFT.O) in hopes of taking on Google. Most value AOL between $3 billion and $5 billion.

"I wouldn't be surprised if we see a consolidation," said Collins Stewart analyst Thomas Egan. "It's easier for Time Warner if that happens as a separate stock because Time Warner doesn't want shares of any of the companies that AOL could merge with as currency."

At Time Warner, plans to become a content company left AOL increasingly out of place. Time Warner wrote down the value of AOL several times.

Time Warner also tried a number of efforts to help the struggling unit, including splitting it into two units, with one focused on audience and advertising, the other on a shrinking dial-up web access business.

But as those failed to turn AOL around, Time Warner came under increasing pressure to shed the business either through a spin off or a deal with Yahoo or Microsoft.

As part of the plan announced on Thursday, Time Warner will buy out Google's 5 percent stake in AOL -- which it bought 2005 in a deal that valued AOL at $20 billion -- before the separation. (Reporting by Paul Thomasch; Editing by Derek Caney)

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