Fretting Debt at AOL

• Email
• Share
• Print

Being in debt can do funny things to a person's, or a company's, thinking. For instance, fellow Fool Tim Beyers provided us all with an invaluable object lesson last week, in his tale of personal debt and redemption, of how he and his family paid off five figures worth of debt.

In deciding how to go about his quest, Tim almost made the mistake of paying off a low-interest auto loan instead of attacking his high-interest credit card bills first. Fortunately, his wife played the invaluable role of sounding board to his idea, urging him to look at the math and Foolishly pay off high-interest debt before lower-interest debt. (Incidentally, even unmarried Fools can benefit from this "sounding board effect" by availing themselves of the advice from other Fools on our discussion boards).

After reading a piece in the TheWashington Times on Saturday, I think Time Warner (NYSE: TWX) unit AOL might want to pay a visit to our discussion boards before proceeding with its plan to sell off a 230,000-square-foot data center in Virginia. Time Warner says it doesn't need the building anymore, because the relentless application of Moore's law to the size of computer data servers (such as those produced by EMC (NYSE: EMC), Hewlett-Packard (NYSE: HPQ), and IBM (NYSE: IBM)) means that Time Warner can now fit more data into fewer servers. Thus, it requires fewer server "hotels" to hold its data now than in the past. That explanation is fine as well as it goes. But the company didn't stop there, suggesting the sale was also motivated by a need to raise cash (the debt-laden company recently announced plans to spend another $435 million to buy privately held Advertising.com.)

Considering that Time Warner still has nearly $20 billion in net debt, and that interest rates on debt are rising, raising cash and paying down debt has to be a concern. The troubling thing about the planned sale, though, is the fact that AOL spent about $100 million to build its data center. Yet according to TheWashington Times, the going rate for buildings of the size AOL will be parting with is roughly $30 million. While the Times suggests that the building will probably command a price "much higher" than the going rate (and Time Warner is keeping mum on its actual asking price), it still seems likely that Time Warner will be selling at a loss.

If that is the case, another one-time charge is in store for Time Warner shareholders come next 10-Q. I have to wonder whether the cash raised by the sale, and the savings on real estate taxes and other costs, is really worth selling the building at a loss.

What's your opinion? Is AOL doing a smart thing by selling off the data center? Share your thoughts with other Fools on the Time Warner discussion board.

Fool contributor Rich Smith owns no shares in any of the companies mentioned.