June 17 (Bloomberg) -- AOL Inc., the Internet company spun off from Time Warner Inc., sold its Bebo social-networking service to Criterion Capital Partners LLC for less than 2 percent of what it paid for the site two years ago.
AOL, which paid $850 million for the site, got less than $10 million for it, said a person familiar with the matter, who declined to be identified since the price wasn’t made public. AOL said in a filing today it expects to record a tax benefit this quarter of $275 million to $325 million from the sale.
The New York-based Internet company said April 6 it was weighing a sale or shutdown of Bebo. AOL said it wasn’t in a position to fund a turnaround at Bebo after losing ground to bigger social-networking rivals Facebook Inc. and News Corp.’s MySpace. The price AOL paid for Bebo included $766 million of goodwill, according to regulatory filings.
“Criterion Capital Partners are specialists in facilitating growth plans and turnarounds,” AOL Chief Executive Officer Tim Armstrong said today in a memo to employees. “For AOL, the transaction will also create a meaningful tax deduction.”
Criterion, a Los Angeles-based merchant-banking and financial-advisory firm, said the deal was led by managing partner Adam Levin, along with strategist Paul Abramowitz and web entrepreneur Richard Hecker. Criterion will take over Bebo’s global operations immediately and base the company out of San Francisco, according to a statement from the firm today.
Neither party will disclose the price, Criterion said. Criterion executives, including Levin, weren’t available to comment, said Jason Damata, an outside spokesman.
TechCrunch reported yesterday that Bebo was sold for $10 million or less.
AOL said it will treat the common stock of Bebo as “worthless” for tax purposes. The tax benefit from the sale is subject to review by the U.S. Internal Revenue Service. AOL said it will also test its goodwill for possible impairment charges this quarter.
AOL may begin to use the tax shield immediately and increase free cash flow “materially,” Clay Moran, an analyst with Benchmark Co., said today in a report.
AOL, which publishes sites such as MapQuest, Politics Daily and Lemondrop.com, rose 37 cents to $22.65 at 4 p.m. in New York Stock Exchange composite trading. The shares have lost 3.7 percent since the Dec. 10 spinoff from Time Warner.
Time Warner CEO Jeff Bewkes has said he may have overpaid for Bebo, calling the May 2008 purchase the company’s “riskiest.” Bebo, founded in 2005, was bought when Randy Falco and Ron Grant were still running AOL. They left in March 2009 when Armstrong was named CEO.
Bebo’s worldwide unique visitors plunged more than 50 percent to 12.6 million in April from a year ago, according to ComScore Inc. Facebook had 519.1 million unique visitors in April, and MySpace drew 111.2 million.
AOL committed in April to offer Bebo’s U.S. employees severance agreements to remain with the business until a strategic decision was reached, according to AOL spokeswoman Tricia Primrose. AOL agreed to pay this severance to employees who stayed during the review period regardless of whether AOL decided to shut down or sell Bebo, she said.
“Substantially all” of Bebo was sold, with the exception of the division’s cash, some contracts and some furnishings in leased office spaces, Primrose said.
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