Dick Parsons, chairman and chief executive of Time Warner whom Carl Icahn wants to oust from his job, has made it clear that he regards the AOL internet division as key to the media group’s future value.

Mr Icahn, who controls around 3 per cent of Time Warner and is gearing up for a proxy fight for full control, yesterday threatened Mr Parsons and the Time Warner board with legal action if they rush into selling a minority stake in AOL.

The warning comes on the back of extensive talks between Mr Parsons and Microsoft and Google, both of which are believed to be interested in acquiring a minority stake in AOL.

“Now that control of Time Warner is threatened, the board had better be sure AOL is not sold too cheaply in order for the board to continue to be left in control,” Mr Icahn said at a securities analysts’ meeting in New York. He said selling a minority stake in AOL, which he called Time Warner’s “great jewel”, could effectively work as a poison pill against bids for the whole of AOL or a bigger part of Time Warner. “I’m going to hold the board of Time Warner personally responsible if they give away AOL for the wrong reasons,” he said.

In addition, Mr Icahn on Wednesday gave some insights into how he plans to wage his proxy fight. This week he enlisted the backing and Wall Street muscle of Bruce Wasserstein, chairman and chief executive of Lazard, in an effort to gain credibility and influence.

Despite Mr Icahn’s reputation as a successful corporate raider and his successes in forcing board changes at other companies, Time Warner’s market capitalisation of $84bn and Mr Icahn’s small stake in the group mean he has to persuade large numbers of investors to back him.

Many shareholders in Time Warner are frustrated by the company’s poor share price performance. Many are still not persuaded that Mr Icahn is the answer to their problems.

“We are eager to listen to [Carl Icahn]”, says Larry Haverty, portfolio manager at Gabelli & Co, a Time Warner shareholder. “But the idea that there’s a lot more to be done that management isn’t doing is one we find hard to come to grips with.”

Mr Haverty’s views are echoed by many other investors. Since Mr Icahn took a stake in Time Warner in August in conjunction with three other hedge funds, he has bought more shares. However, no other investors have publicly backed his calls for an immediate $20bn share buy-back and a complete spin-off of Time Warner’s cable business.

“There aren’t a whole lot of investors I talk to who feel that the stock price is the result of poor decisions that management has made. Media is in a funk,” says one prominent Wall Street analyst. But Mr Icahn says “a lot of shareholders” agree with his view that Time Warner’s management is not doing enough to create value for investors. “After studying Time Warner more and more, it is a bit upsetting to have this management team calling all the shots and not listening to shareholders,” he says.

He believes that by enlisting Mr Wasserstein in his proxy fight for board control of Time Warner, more investors will be confident about backing him.

On Wednesday he said an important part of his strategy would involve trying to obtain the backing of Institutional Shareholder Services and other shareholder advisory groups.

Because of Time Warner’s size and the fact that it has a broad shareholder base, the group has a relatively large number of indexed investors. These passive investors will cast their votes in a proxy battle as directed by ISS and others.

“Five years ago, we would have had no chance,” said Mr Icahn. “But today, good things are going for activist shareholders in Time Warner who will listen to us. More importantly, you have a lot of indexed funds and mutual funds and we will aim to get the support of ISS and others to get their votes.”

Despite the obstacles he faces, Mr Icahn’s plan to fight for control of Time Warner puts added pressure on Mr Parsons.

If he can come up with a deal that lifts Time Warner’s share price above $18, he will be able to take much of the steam out of Mr Icahn’s proxy fight. If he doesn’t, investors might yet become more receptive to considering an alternative.

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