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Verizon AOL split
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Private equity won’t buy Huffington Post on its own

May 12, 2015

Verizon (vz) this morning announced an agreement to buy AOL (aol) for $4.4 billion, in an apparent attempt to marry the technology world's two most annoying sounds.

A couple of thoughts on the deal:

1. A "significant" transaction? Today's news comes five months after Bloomberg first reported that the two sides were in merger talks. At the time, however, Verizon CEO Lowell McAdam said that his company wasn't having any "significant acquisition discussions," and suggested that Bloomberg's sources had misconstrued strategic partnership talks.

That leaves us with three options: (1) McAdam lied; (2) The strategic partnership chitchat evolved into acquisition negotiations sometime after January; (3) Verizon doesn't consider a $4.4 billion acquisition to be terribly "significant," no matter how much AOL might mean to Internet and corporate M&A history buffs.

2. Second shoe: Kara Swisher is reporting that AOL has been simultaneously negotiating a sale of HuffingtonPost. She writes:

The talks have been most serious with Axel Springer, the German media conglomerate, but a number of private equity firms have also expressed interest in the high-profile property. Sources said the Huffington Post has been valued at above $1 billion in this scenario, which would either be a complete sale or, more likely, structured as a joint venture.

The idea of a strategic spinoff or partnership makes a lot of sense since, as Fortune's Erin Griffith noted, Verizon is buying AOL for its ad technology, not its content. And while I could see AOL boss Tim Armstrong trying to use the specter of private equity to drive up HuffingtonPost's value, it's hard to imagine financial sponsors having any actual interest.

Remember, private equity typically uses leverage to buy companies, and then relies on cash-flow to cover debt interest and repayment. But HuffingtonPost is not believed to be profitable, in large part due to its international expansion efforts (AOL does not break out HuffingtonPost's financials, which are part of its Brand Group). And an independent HuffingtonPost might need to add all sorts of back-office expenses that it currently only pays for partially via shared service arrangements. So how exactly would private equity firms finance the deal? Sure it could slow down growth, but that would seem to defeat the value proposition of owning a growing media property.

I've seen some suggestions that this would be similar to later-stage financing deals for Buzzfeed or Vox Media, but those were much smaller growth equity transactions that didn't require leverage. No growth equity firm is going to go it alone and pony up $1 billion out of its own coffers.

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