AOL's Patch May Be Dismantled: Source

By Mergers and AcquisitionsFOXBusiness

AOL (NYSE:AOL) shopped its Patch news service for several months to various media companies before reaching a deal with private equity firm Hale Global for what’s been described as a low-ball bid for the money-losing venture, the FOX Business Network has learned.

Officially, AOL entered a joint venture with a financial buyer, announcing on Wednesday that it is partnering with Hale Global. But under the terms of the deal, the private equity firm will have full operational control and a majority stake in the Patch business.

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People with direct knowledge of the deal tell FOX Business that the various negotiations were moving slowly even though AOL was eager to offload its failed investment.

AOL shopped Patch to Gannett Co. and Tribune Co., and others, these people say, but both media companies were skeptical about Patch’s ability to eventually turn a profit and the talks broke down. The media buyers also believed it would be difficult to integrate the businesses, these people add.

Unable to find a strategic buyer among various media players, AOL finally settled on a deal with Hale, which is regarded on Wall Street as a firm that looks for so-called turnaround situations.

AOL and Tribune declined to comment. Gannett could not be immediately reached.

An AOL internal memo said Hale is “dedicated to nurturing Patch’s growth,” but a source familiar with the deal said that Hale may ultimately “dismantle” Patch, selling off the assets to multiple buyers.  Hale will soon be determining which employees it wants to retain and which will be laid off, the person said.

The price of the deal was not disclosed, but one person with knowledge of the terms says it’s unclear if AOL will recoup its initial investment in Patch. AOL purchased Patch in 2009 for $7 million and has reportedly invested more than $100 million in the business. Patch was never profitable and was the subject of a firestorm of negative publicity.

AOL CEO Tim Armstrong previously promised that the company would find a solution for Patch by the end of 2013.

Media experts once regarded Patch as the future of journalism. Its “hyper-local” news sites were considered a replacement to the dying breed of community newspapers that had traditionally supplied local news to small towns and cities.

Armstrong himself took a personal interest in Patch, envisioning a web-based newspaper that offered original reporting to these markets and would generate significant revenue from local advertisers. Although some of the more than 900 markets achieved strong readership, the costs of the operations outweighed the revenue nearly everywhere.  Ultimately, the structural problems contributed to low morale and a loss of key talent.

“Patch was becoming a drag on management’s time and focus,” says Neil Doshi, analyst at CRT Capital. The failed project “was very close to Tim Armstrong,”  Doshi says, but the move is good news for investors because it shows that Armstrong followed through with his promise to find a partnership solution.

This gives Armstrong an opportunity to “focus on the core AOL business and invest in mobile, where they are behind,” Doshi said.

In addition to Patch, AOL has invested in a variety of media properties. AOL bought Huffington Post for $315 million in 2011 and TechCrunch for an undisclosed price in 2010. FOX Business first reported that AOL held talks for a possible purchase of Business Insider for over $100 million in late 2013.

Although the parties didn’t strike a deal, those with knowledge of the situation says it’s possible that AOL and Business Insider will revisit acquisition discussions.

Says Doshi, it “wouldn’t surprise me if they try to make another play for it.”

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