AOL Time Warner yesterday suffered another battering on reports that the world's largest media business will take a further $10bn charge to reflect the dwindling value of its internet service provider.
Analysts cautioned that the charge could have a damaging effect on AOL Time Warner's credit ratings and increase the strain on its balance sheet.
Wayne Pace, the chief financial officer, warned in October that further charges would likely be incurred on top of the record-breaking $54bn write down in the first quarter. "Based on current market conditions and the lower-than-expected results at our AOL division, it is probable that a substantial overall impairment has occurred," he said.
Last month, the company underlined just how badly the America Online business has been doing and said it expected advertising and e-commerce revenues to fall by up to 50% next year.
Analysts now believe that "substantial" impairment could reach another $10bn, or go even higher.
The $54bn charge already taken represents the crumbling value of America Online since the merger with Time Warner two years ago.
Under new accounting rules, companies have to reflect any change in the value of their assets on the balance sheet on an annual basis. Shares in the company have fallen by 70% since the merger and more write downs can only damage sentiment further. The shares fell sharply in early morning trade yesterday before rallying with the broader market.
A company spokeswoman declined to comment on the size of the write down but was keen to stress that it was an accounting charge. "This charge is non-cash and it does not affect the earnings or the operation of the business," she said.
But Robert Willis, an accounting specialist at Lehman Brothers, said it could have adverse consequences. He said a large charge "could very well have material impact on debt covenants because it erodes net worth". The company is shouldering around $26bn in debt.
America Online was dealt another blow late on Wednesday when Microsoft signed a deal with Charter Communications, the number three US cable operator, to promote and market the software firm's MSN 8 internet service. AOL Time Warner has been struggling to cut deals with the cable networks.
America Online yesterday named Leonard Short as vice-president of brand management to oversee much of the operation's marketing efforts. He will hope to play a part in reversing falling advertising revenues and reigniting subscriber growth at the internet service provider.
