Time Warner plans AOL action; Sun shares fall as IBM hopes fade; SumTotal likely to reject Vista

By Cristal Cody

Tupelo, Miss., April 6 - Time Warner Inc. made a move on Monday that could set the company up for a spinoff of AOL LLC, according to a filing with the Securities and Exchange Commission.

In other potential deal action, shares of Sun Microsystems, Inc. sank on Monday as news circulated that a buyout deal with International Business Machines Corp. fell through.

Meanwhile, SumTotal Systems, Inc. is expected to reject the too-low $3.25-a-share cash offer made by private equity firm Vista Equity Partners Fund III, LP on Monday, an analyst told Prospect News.

Also on Monday, an analyst said drug wholesaler Cardinal Health Inc. should complete a spinoff of its clinical and medical equipment unit by September.

Meanwhile, investors pushed stocks down on Monday and sent the Dow Jones Industrial Average back below 8,000.

The Dow lost 41.74 points, or 0.52%, to close at 7,975.85.

The Standard & Poor's 500 index lost 7.02 points, or 0.83%, to finish at 835.48, and the Nasdaq Composite index fell by 15.16 points, or 0.93%, to 1,606.71.

AOL action ahead

Time Warner filed a consent solicitation statement on Monday to amend covenants with bondholders that could restrict the company's ability to sell the AOL unit or its assets.

Time Warner is soliciting consent from holders of $12.3 billion of debt and has offered $5 for each $1,000 in principal in exchange for lifting certain restrictions on the sale of AOL properties and assets. The consent solicitation expires on April 15.

"Although the board of directors of Time Warner has not made any decision, Time Warner currently anticipates ... that it would initiate a process to spin off one or more parts of the businesses of AOL LLC to Time Warner's stockholders, in one or a series of transactions," the company said.

Time Warner said in the filing that the amendments would provide greater flexibility in considering strategic alternatives.

"The market doesn't fully value the AOL assets at Time Warner," said Collins Stewart plc analyst Thomas Eagan, who values AOL's combined business units at $4 billion to $5 billion.

Some deal action with the company should take place this year, but it may not be a spinoff, he told Prospect News.

"We're not sure about that - it could be a merger with someone, whether or not they're an online player," he said.

In January, Google Inc., which owns 5% of AOL's outstanding shares, exercised its right to request the investment be registered for sale in an initial public offering. Time Warner has the right first to purchase Google's equity interest for cash or shares of Time Warner common stock.

Time Warner, a New York-based media and entertainment company, said in Monday's filing that it has not determined what action it will take with the Google stake.

Last month, the company hired Timothy Armstrong, a former senior vice president of Mountain View, Calif.-based Google, to be AOL's chairman and chief executive officer.

Time Warner's stock closed Monday down 66 cents, or 2.97%, at $21.56. Shares have traded from $17.81 to $50.70 over the past year.

Google shares lost $1.54, or 0.42%, to close at $368.24.

Sun, IBM deal stalls

An IBM spokesman told Prospect News on Monday that the company had no comment on the deal speculation surrounding the company and Sun Microsystems.

Santa Clara, Calif.-based Sun Microsystems representatives did not return a message for a response.

Sun Microsystems' stock fell $1.93, or 22.73%, to close at $6.56 on Monday.

Shares had steadily gained from the $4.97 closing price on March 17, a day before the two computer and software companies were first rumored to be negotiating a deal.

Armonk, N.Y.-based IBM apparently was the only bidder in the ring.

Intel Corp. CEO Paul Otellini said in an employee meeting last month that was disclosed in a regulatory filing that "Sun was shopped around the valley and around the world in the last few months."

IBM's stock fell 66 cents, or 0.65%, to close at $101.56 on Monday.

Shares of Santa Clara, Calif.-based Intel closed at $15.86, down 9 cents, or 0.56%.

Vista's cheap bid

Vista Equity Partners' $3.25-a-share offer for SumTotal represents a 62% premium to the company's closing share price on Friday and values the company at about $103 million.

A more accurate value for the company is about $4.50 a share, Kevin Liu, an analyst with B. Riley & Co., Inc., said in an interview Monday.

"We think it's just the first step in getting activity going, but we do think the company will ultimately be sold," he said. "Ultimately, the company has little choice but to pursue the sale."

The Mountain View, Calif.-based software solutions company has not been able to provide fiscal 2009 guidance because of current economic conditions.

"The Vista offer seems pretty concrete from the perspective that they don't base it on any financing condition," Liu said. "But we also think the offer price is fairly low and shareholders would like to see a higher offer."

SumTotal said in a statement Monday that the board is reviewing the proposal.

Vista, a private equity firm with offices in San Francisco and Chicago, owns about 13% of SumTotal's outstanding shares and is the company's largest stockholder.

Vista also announced that it will nominate three directors to the company's board at the annual shareholders meeting on June 12.

Also on Monday, Chicago-based merchant banking firm Discovery Group, which owns 9.8% of SumTotal's outstanding shares, encouraged the company to shop around for interested bidders.

SumTotal's stock jumped 99 cents, or 49.25%, to close at $3.00 on Monday. Shares have traded from $1.24 to $5.15 over the past year.

Cardinal's fall spinoff

Dublin, Ohio-based Cardinal Health said last month it plans to spin off its clinical and medical products segments into a new company called CareFusion Corp. in a public stock offering.

CareFusion products include respiratory care, surgical instruments and diagnostics and monitoring equipment.

Cardinal Health said that it will offer 80% of the shares in the new company and will divest the remaining 20% of CareFusion shares within five years.

An analyst said Monday that the spinoff should be completed by September but not to expect a much higher price for Cardinal Health after the split.

"We understand that a spinoff can take three to six months to complete after first filing with the SEC," the analyst said. "We estimate that in a spinoff situation, Cardinal could be worth $33.30 per share, while it is currently trading at $32.46 per share."

Cardinal Health's shares closed up 49 cents, or 1.51%, at $32.95 on Monday.

Mentioned in this article:

Cardinal Health Inc. NYSE: CAH

Google Inc. Nasdaq: GOOG

Intel Corp. Nasdaq: INTC

International Business Machines Corp. NYSE: IBM

SumTotal Systems, Inc. Nasdaq: SUMT

Sun Microsystems, Inc. Nasdaq: JAVA

Time Warner Inc. NYSE: TWX

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