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Hottest Media Property That's Not for Sale? Time Inc.

But Skeptics Question Top Execs' Real Long-Term Intentions

By Published on . 1

NEW YORK (AdAge.com) -- Time Warner chief Dick Parsons recently told a "town hall" meeting of 400 employees about a conversation he'd had with Omaha investment wizard Warren Buffett on the subject of selling Time Inc. "As your friend, don't do that, it's a good business," said Mr. Buffett, according to people who heard Mr. Parsons recount the story. "But," he added, "if you do sell it, sell it to me."

Profit margins
And there's the rub. Time Inc. consistently makes impressive double-digit profit margins and is considered by many a good media business, a still-growing company with as-yet-unlocked potential synergy with the rest of the Time Warner operation. That fact, along with Mr. Parsons' persistent denials that there are any plans to sell, ought -- one might think -- to kill this story. Yet everyone from the Time & Life Building to Wall Street and Nebraska keeps on wondering when the property is going to be dealt.

It's also been noted that Mr. Parsons, whose contract is up in May 2008, is not Jeffrey L. Bewkes, Time Warner's president-chief operating officer and the company's heir apparent. And Mr. Bewkes has repeatedly said that nothing is off the table. "It is constantly looked at," Mr. Bewkes said at a Goldman Sachs media conference last September. "What should we not have? Or what should we get?" Many people believe Mr. Bewkes would sell Time Inc. for the right price.

A note to skeptics: Time Inc. could probably fetch bids above $16 billion. Try finding a CEO who wouldn't at least slow down for a look.

Anyone following the ongoing upheavals in media -- not to mention the jangled nerves following round after round of layoffs at Time Inc., where McKinsey & Co. is now examining areas like information technology and finance -- won't be surprised to hear that questions over Time Inc.'s place at Time Warner aren't going away.

Bear Stearns
The Monday after Mr. Parsons' "town hall," as it happens, a Bear Stearns analyst raised his rating on Time Warner to "outperform" partly because he believes the company, particularly once Mr. Bewkes takes over, will get more aggressive about restructuring its portfolio. To wit: It could merge AOL with another leading web property -- or perhaps could spin off Time Inc.

"We think that the publishing division is the least attractive strategic fit with Time Warner's other video-centric businesses such as cable networks, cable systems and filmed entertainment," said the analyst, Spencer Wang, in his note. Combined with challenges in the magazine business such as slow growth due to online cannibalization, he said, there could be several benefits of divesting publishing.

A year ago, Reed Phillips -- managing partner at the media-investment bank DeSilva & Phillips -- would have given a Time Inc. sale or spinoff no chance. "Today I would no longer say 'never,' because Time Warner has continued to change and evolve," Mr. Phillips said. "I get the clear impression that the company is focused on operating performance and measures how each division is doing and how each division contributes to the overall company. And if there's a sense that part of the company is no longer contributing in the way that top management expects, I don't think anything's sacred."

Strikingly difficult decisions
Top management at Time Warner, like that at any public company, is under pressure to improve revenue and earnings year after year, no matter the market conditions. Although Time Inc. Chairman-CEO Ann S. Moore is expanding quickly online, moving the needle with print has proved much harder. That has forced strikingly difficult decisions, most recently last week's death sentence for the Life newspaper supplement.

"Wall Street wants to see growth," said Robert Safian, the Fast Company editor and Mansueto Ventures managing director who worked for Time Inc. titles Money, Fortune and Time during the last decade. "The bigger your base, the more you need in raw terms to show it. But if you back Time Inc. out of Time Warner and there's more growth in other divisions, then the overall growth might look bigger."

Plenty of people still consider the idea -- first pushed to the front burner during Carl Icahn's 2006 drive to break up Time Warner -- to be unlikely, impossible or ridiculous. For one thing, "Time" is the name on Time Warner's door, said Andrew Swinand, president-chief client officer at media agency Starcom USA. "I would be shocked if they sold it," he said. "For me, the biggest thing is that Time Warner as a company needs to be dynamically flexible. I still believe that the initial vision of integrated media was correct. I just believe that they haven't activated it."

Long Tail value
The tax hit on any outright sale would be painful too, if less so in a spinoff to shareholders (which could lead in turn to a takeover). Time Inc. also owns huge stores of content that should prove valuable in a Long Tail world. And the company has been securing better position for showing growth by cutting costs, redirecting investment to digital projects, selling 19 magazines and closing two others.

"Corporate has worked closely with Time Inc. in developing its new online strategy, which is showing success," a Time Warner spokesman said. "We don't have any plans to spin off Time Inc." A Time Inc. spokeswoman referred inquiries about the company's relationship with Time Warner to the parent company.

Finally, there's the issue of price, but that could cut either way. Two media bankers said a premium property like Time Inc. -- which really has no equal in its business -- would command a sky-high multiple of perhaps 15 times earnings before interest, taxes, depreciation and amortization. Last week's client note from Bear Stearns estimated that Time Warner's publishing division will have 2007 EBITDA of nearly $1.1 billion, which could put a bid close to $16.5 billion.

That is not a figure anyone would take lightly -- neither a potential bidder nor the potential seller.

Private-equity firms
But the money is out there. "Private-equity firms have become so much bigger in the past year that now that kind of bite size is attainable," Mr. Reed said. "A private-equity firm could do that transaction today. It would have been much harder to do a year ago, but they've raised so much money, and you see all the time that they're looking at big media opportunities."

Time Warner shareholders wouldn't let management ignore a $16 billion offer either. "Companies can't just stiff-arm shareholders," Mr. Reed said. "They really have to listen today, more and more."

Meanwhile, the thousands of Time Inc. employees who survived the cuts of 2005, 2006 and 2007 walk the corridors occasionally wondering what Ms. Moore, Mr. Parsons and Mr. Bewkes really think of them.

"I don't think anyone is confident that Time Inc. will stay part of Time Warner," said one former Time Inc. executive, who predicts the conglomerate will eventually split up. "From the CEO down, everyone questions whether or not Time Inc. will be spun off."

Advantages of a sale
There certainly could be advantages for an independent Time Inc., such as a better ability to focus on long-term strategy. Mr. Swinand, the sale skeptic, said Time Inc. would have fewer resources on its own but would be speedier and more flexible.

Mr. Reed, the agnostic, said Time Inc. wouldn't lose much if separated from Time Warner and would retain enormous clout. "They would also be able to invest much more aggressively in taking the brands into the digital realm," he said. "They're doing a pretty good job already; it's just that they're hamstrung by having to deliver earnings to the parent company."

All the talk of speed and aggression, as a matter of fact, reflects the reality of the magazine business today. It's in transformation. The business will survive, but those publishers that adapt best will thrive the most. Others will keep having to make difficult choice after difficult choice, pinned between the need to prepare for the future and the state of the field today. Even though Time Inc. owns some incredibly powerful brands, really changing the business model might take a "reset" year -- which Wall Street rarely allows public companies.

As things stand, the need to make short-term numbers all the time is breeding resentment.

Women's lifestyle publications
"Basically the dollars are going into digital at that company," the former Time Inc. executive said. "If you're not one of the four weeklies, people are very frustrated. They are not putting money behind transforming the women's lifestyle publications. Those are the ones that have had constant growth, and yet they're not getting the investment."

Another former staffer recalled the speculation among Time Inc. employees. "There was hallway chatter about it at different times," the ex-staffer said. "Sometimes it was hopeful. 'Wouldn't it be great? Will Warren Buffett buy us?' Other times people said, 'Who would buy us and what would they do with us? They might squeeze us even harder. That Midtown real estate is expensive. Maybe Time Inc. could move to Princeton, N.J.'"
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