The New Time Inc.: Hunter or Prey?

Independent Company Will Be Bigger Than Publicly Held Rivals

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The spinoff of Time Inc. to create the world's largest publicly-traded magazine publisher may be just the beginning of deals for the owner of People and Sports Illustrated.

A recent Sports Illustrated cover played on 'Game of Thrones,' the show from HBO -- a Time Inc. sibling for now
A recent Sports Illustrated cover played on 'Game of Thrones,' the show from HBO -- a Time Inc. sibling for now

With analysts estimating an enterprise value of about $3.9 billion -- a measure of what it could cost to buy a company -- an independent Time Inc. will be bigger than any other publicly held enterprise focused on magazine publishing, according to data compiled by Bloomberg. Following a failed attempt to divest some magazines to Meredith Corp., Time Inc. could actually buy Meredith, which is half its projected size, to consolidate costs, said Wunderlich Securities.

Or, Time Inc.'s titles and its more than $3 billion in annual revenue may lure private-equity interest, said Wedbush Inc.

Time Inc. "could either be an acquisition target for a larger, traditional publishing company or it could itself be an acquirer," Brett Harriss, an analyst at Gabelli & Co., which owns Time Warner shares, said in an interview. "It's clear that magazine publishing is likely in secular decline. That being said, it doesn't mean it's valueless."

The spinoff, planned for this year, will shield Time Warner's cable networks and film studio from the publishing industry's struggles with the transition to the internet and lower online advertising rates, according to Argus Research Co. Time Warner shares already have risen 7.9% since talks of separating the magazine unit emerged, almost eight months after Rupert Murdoch's News Corp. announced plans to split its entertainment and publishing businesses.

Keith Cocozza, a spokesman for Time Warner, declined to comment on the possibility of other deals for Time Inc.

Time Warner announced on March 6 its decision to spin off the publishing unit to shareholders following the attempt to strike a deal with Meredith, the publisher of Better Homes and Gardens and Ladies' Home Journal. The Meredith deal that had been discussed would have made the magazines the basis of a new publicly held business focused on women, a person familiar with the matter said last month. The talks faltered after Time Warner decided it wanted to unload all 21 publications at once, the person said. Meredith had not wanted to take on Time, Fortune, Sports Illustrated and Money.

Meredith CEO Stephen Lacy said in a statement last week that the company remains open "to continuing a dialogue on how our companies might work together on future opportunities." Art Slusark, a spokesman for Meredith, declined to comment beyond the statement, when asked about potential deals with Time Inc.

As a public company, projections for Time Inc.'s enterprise value -- or the sum of its equity and debt minus cash -- range from $2.7 billion to about $4.9 billion, according to six analysts' estimates compiled by Bloomberg. The average estimate of about $3.9 billion would far outstrip Meredith's enterprise value of $1.97 billion. About three-quarters of Meredith's revenue comes from national magazines with the remainder from local TV stations.

Many of Time Inc.'s magazine rivals are closely held, including Conde Nast, the publisher of Vogue and Vanity Fair that's owned by Advance Publications, and Hearst Corp., the owner of Cosmopolitan.

Time Warner executives are looking at starting Time Inc.'s debt at about three times its annual operating income, which would amount to about $1.2 billion, according to two people familiar with the discussions who asked not be named because the matter hasn't been settled.

In contrast, News Corp.'s publishing business, which includes the Wall Street Journal and other newspapers, will have $2.6 billion in cash and no debt when it separates in June.

While the details of the separation are still being worked out, Time Warner "will attempt to minimize Time Inc.'s cost of capital, while providing it sufficient strategic flexibility and balance sheet strength," said Mr. Cocozza, the spokesman for the parent company.

The company flagship, one of the titles Meredith was not interested in taking over
The company flagship, one of the titles Meredith was not interested in taking over

Time Warner's decision to spin off the publishing unit doesn't preclude a future deal with Meredith -- anything from a joint venture to a takeover, said Barton Crockett, an analyst at Lazard Capital Markets. "Those discussions don't have to end just because Time Inc. is a separate company -- in fact, it might be easier," Mr. Crockett said. "Time Inc. will be a very focused magazine company and so they'll be very focused on maximizing value for their shareholders."

Time Inc.'s size relative to Meredith could make the company an acquirer, rather than a target, said Harriss of Gabelli, a unit of Gamco Investors, which oversees $36 billion in assets.

A purchase of Meredith could help Time Inc. cut overhead costs and broaden its subscriber base by cross-promoting titles, said James Dix, an analyst at Wedbush.

Despite the cost benefits, Edward Atorino of Benchmark Co. said cultural differences between Des Moines, Iowa-based Meredith and Time Inc.'s legacy as part of Time Warner may keep the two apart. Plus, members of the founding Meredith family would have to approve a takeover because they control more than 50% of the voting power.

"Meredith is a small-sized company," Mr. Atorino said. "Time Warner is a big giant media company. Putting Better Homes and Time Inc. in the same package to me doesn't work."

Instead, Meredith may prefer to purchase individual Time Inc. titles -- such as Cooking Light, Health, Southern Living and Coastal Living -- after the spinoff, according to John Crowther, an analyst at Piper Jaffray Cos. Meredith bought FamilyFun magazine last year and acquired Every Day with Rachael Ray in 2011.

"Meredith has been very successful with tuck-in acquisitions," Mr. Crowther said. "If Time Inc. decides to retrench to their core, there definitely are complementary magazines throughout their portfolio that would fit underneath Meredith."

It's also possible that an independent Time Inc. could itself become a buyout target, said Mr. Dix, the Wedbush analyst. The business may generate $547 million in 2013 earnings before interest, taxes, depreciation and amortization, according to Credit Suisse Group's Michael Senno.

"It's the type of business that could potentially be attractive to private equity," Mr. Dix said. "Although it does have secular challenges, it does have some recurring revenue streams and then you do have the brand value of a lot of these titles."

The separation of Time Inc. marks Time Warner's third major spinoff since Jeff Bewkes became CEO in 2008. Time Warner Cable, the second-largest U.S. cable company, became independent in March 2009, while AOL was spun off later that year.

By jettisoning Time Inc., Time Warner "will be freed from the drag of the no-growth magazines, which have been in long- term secular decline," Joseph Bonner, an analyst with Argus, wrote in a March 7 note.

Time Inc.'s revenue has fallen in five of the last seven years, making it the biggest laggard among Time Warner's divisions. The unit's revenue of $3.4 billion in 2012 represented more than 11% of Time Warner's total revenue, according to data compiled by Bloomberg.

While those declining revenues and struggles with the transition to digital from print may deter private-equity suitors, Time Inc. may be driven to an eventual tie-up with Meredith to combat the pressures of an evolving industry, despite disparate corporate cultures, said Matthew Harrigan, an analyst at Wunderlich.

"There are so few survivors in the business now that it sort of makes sense from a logistic standpoint," he said in a phone interview. "You'd probably have 18 months or so where you try to see what you can do. At that point, maybe you revisit the strategic alternatives."

~ Bloomberg News ~

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