July 27 (Bloomberg) -- AOL, the Internet unit being spun off from Time Warner Inc., may be worth less than $5.66 billion, based on the price Google Inc. received for its 5 percent stake in the company.

Time Warner, based in New York, said in a regulatory filing today it repurchased the stake on July 8 for $283 million, a price that includes cash distributions owed to Google.

AOL, an online pioneer, is worth a fraction of the $20 billion implied when Google paid $1 billion for the stake in 2005. Time Warner said in May it plans to spin off AOL into a separate, publicly traded company this year. The Web service has been hit by competition and falling advertising sales.

Google’s holding fetched less than the $330 million David Joyce, a New York-based analyst with Miller Tabak & Co., estimated on July 20. The Mountain View, California-based company, owner of the biggest search engine, wrote down $726 million of its AOL investment last year.

As part of the 2005 deal, Google agreed to provide Web- search service to AOL and share in the ad revenue the inquiries generated. AOL has agreed to use Google’s search services and sponsored links through at least December 2010, according to the filing.

Ed Adler, a spokesman for Time Warner, declined to comment on AOL’s value. Jane Penner, a spokeswoman for Google, declined to comment beyond the filing.

Time Warner rose 2 cents to $27.60 at 4:15 p.m. in New York Stock Exchange composite trading. Google fell $1.92 to $444.80 on the Nasdaq Stock Market, giving the company a market value of $140.5 billion.

Armstrong’s Plans

AOL Chief Executive Tim Armstrong told employees last week that job cuts are possible as he undertakes a 60-day review of the Internet company’s cost structure. Armstrong, a former Google executive named AOL CEO in March, also plans to overhaul advertising and develop more local Web sites to help revive falling sales.

Today’s filing also disclosed that Armstrong’s three-year contract, ending in April 2012, provides a salary of $1 million a year and a cash bonus of as much as $4 million. His 2009 bonus is guaranteed to be at least $1.5 million.

AOL’s first-quarter ad sales fell 20 percent. They may have dropped 20 percent again in the second quarter, Spencer Wang, an analyst with Credit Suisse Groupe AG in New York, estimated in a report today. He rates Time Warner shares “neutral.”

Time Warner plans to report second-quarter earnings results on July 29 before U.S. markets open.

To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net

Last Updated: July 27, 2009 20:10 EDT