AOL Time Warner cuts forecasts and buys out Bertelsmann's stake

AOL Time Warner cut its profit forecasts for the second time in five months last night as it said it would buy out Bertelsmann's stake in their internet joint venture, AOL Europe, for $6.75m (£4.69m) cash.

The entertainment and media group, created by the merger of the TV, film and publishing giant Time Warner with the world's largest internet company AOL a year ago, was still forecasting underlying double-digit growth for 2002 last autumn in the wake of the 11 September attacks and the global advertising downturn.

But yesterday it predicted its earnings before tax, interest, amortisation and depreciation would only grow by 8 to 12 per cent in 2002, after rising 18 per cent to just under $10bn in 2001, compared with earlier forecasts of 15 per cent growth. The group expects 2001 sales to rise 5 per cent to just over $38bn. It will also take a $40bn to $60bn charge to write down goodwill in the first quarter to reflect the fall in share values since its merger was announced. It will report full results for 2001 on 30 January.

Shares in AOL Time Warner, which have fallen from $58.50 last June as advertising revenues and new subscriptions have slumped, ended up $0.73 at $32.68 yesterday as Wall Street anticipated last night's announcement. Expectations that it would pay for part of Bertelsmann's 49.5 per cent in AOL Europe in shares had added further pressure to the stock since the German media group decided to exercise its option to sell out last autumn.

Under the deal, which was struck when Time Warner first announced its merger with AOL at the height of the internet boom in March 2000, AOL Time Warner agreed to pay $2.5bn of the $6.75bn in cash, but had the option to pay the remainder in shares.

Many analysts now expect AOL Time Warner to build up AOL Europe in advance of a stock market listing within the next few years. "I think AOL Europe will be gearing up for an IPO [initial public offering]. It won't be immediately – maybe, two years out," one London-based analyst said yesterday. "But before they do so, they'll need a portfolio of assets." The venture currently has 5.5 million subscribers in France, Britain and Germany.