OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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AOL is really the tail there. Time Warner is the dog.

Berghoef: One company that we've bought significant amounts of - and one that's near and dear to your heart, Carol - is AOL Time Warner.

Carol Loomis: That was certainly going to be my first question - to ask you about that. [She laughs.]

Berghoef: It's just amazing. Every day there's another headline about AOL Time Warner. I mean, it's like The Wall Street Journal and The New York Times have become the local gossip sheets when it comes to that company. And what continues to amaze us is about the only thing they ever talk about is the AOL segment. But AOL is really the tail there - it's not the dog.

And that's not what we're focusing on. In fact, we're waiting for them to change the name so we don't have to say "AOL Time Warner" anymore. I'm sure it'll happen.

This stock was what, $60, a few years ago? And I don't know what it was after the merger - maybe $70? Well, it went all the way down to $8.70 recently.

What we like most about AOL Time Warner is the traditional Time Warner businesses. There's the networks - from HBO to Turner to Warner Brothers. The cable systems are almost as important as the networks. And then you've also got the music business - where they're having a lot of problems right now due to piracy. But I have a feeling they may be able to figure that out technology-wise. And then there's the publishing business - which is also still a terrific business.

And when we put a value on each of those segments and add it up, we think the value of the non-AOL segments is something approaching $20.

Incredibly, we think AOL will be worth more than nothing.

Berghoef: What is AOL worth? We don't really know. And most people these days seem to be very skeptical that it might ever be worth anything. And I don't know what it's going to be worth. But my gut says it's going to end up being worth more than people now are giving it credit for….

Nygren: We do think it's ridiculous to think a business like AOL with something like 25 million subscribers paying close to $20 a month, the strongest brand name in the industry and positive cash flow generation, is actually worth zero. That seems silly to us.

I'm not worried about the debt. The company can handle it.

Loomis: How about the very large load of debt? Does that worry you?

Berghoef: It doesn't really worry me - because the company can handle it. I expect to see some asset sales. [CEO] Dick Parsons pretty much has said as much. He'll probably raise a few billion from asset sales. The company has very strong free cash flow. And they should be able to pay down debt over time. I'd like to see it lower. But I'm not really worried about them being able to handle it.

Nygren: I think the debt level there is pretty traditional for the cable TV industry. Cable service providers tend to have very high debt levels. So if you look at that piece of it, it doesn't look that out of line.

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