By Jennifer Saba
March 7 In giving up on its magazine business,
Time Warner Inc (TWX.N) is set to hand its shareholders an
operation that has shrinking sales and profits - and will be
looking for a new chief executive.
While the details of the spin off of Time Inc are still to
be announced, the media conglomerate has indicated that it will
be structured as a tax-free transaction for its shareholders. It
has already previously spun off other businesses to investors,
including AOL and Time Warner Cable.
Time Inc faces the same challenges as print publishers
everywhere, mainly that people are choosing to read on
smartphones and tablets and advertisers are spending the bulk of
their budgets elsewhere. As a separate public company, it won't
be able to hide behind its media conglomerate parent, and will
face scrutiny from investors expecting it to generate free cash
flow and stem revenue declines.
"This once proud and profitable division is being punted as
its business prospects look structurally challenged," wrote
Nomura Equity Research analyst Michael Nathanson in a note about
the spin-off on Thursday. Time Inc publishes more than 100
magazines worldwide, including the eponymous newsweekly Time,
Sports Illustrated, and People.
Over the past decade, Time Inc's revenue dropped almost 40
percent to $3.4 billion while its operating profit fell in half
to $420 million.
Advertising revenue for the entire U.S. magazine industry
fell 3 percent in 2012 to $21.07 billion while ad pages declined
8 percent compared to 2011, according to the Publishers
"You don't have revenue that is stable," said Nathanson in
For now, Time Warner offers few details about it publishing
assets in its results since they represent such a small part of
operations - roughly 8 percent of 2012 earnings before interest,
taxes, depreciation, and amortization.
Nomura's Nathanson estimates that as a stand-alone company,
Time Inc will have an enterprise value of about $2.3 billion, or
about $2.50 per share. It is unclear what investors will be
willing to ultimately pay for it, though. Time Warner's shares
closed on Thursday at $56.78.
"If you can formulate a thesis where the ad declines
moderate and the subscription growth starts to accelerate and
costs are kept down, it's an asset where you can grow the cash
flow," said John Janedis an analyst with UBS.
A source familiar with the company's thinking said that with
an optimal financial structure, and the fact that Time Inc has
been gaining share in the magazine market, it could be in a
position as a consolidator. The company has yet to indicate what
its financial structure, and particularly its debt levels, will
be after the spin off.
"As we saw with the prior spin-offs of Time Warner Cable and
AOL, we expect the separation will create additional value for
our stockholders," Time Warner Inc CEO Jeff Bewkes said in a
statement on Wednesday.
Shares of Time Warner have gained more than 50 percent in
the last year on the back of strong revenue from its cable
assets. Following the magazine separation, it will remain home
to pay-TV channel HBO, cable networks TBS, TNT, CNN and movie
studio Warner Brothers.
While other media conglomerates have moved to spin out their
publishing assets, Time Inc will be unique as a print-only
company, making its transition to having a greater reliance on
digital rather than print sales more urgent.
Even Meredith Corp (MDP.N), the media company approached by
Time Warner for a proposed merger of some of its magazines, has
other faster-growing assets, including a marketing service arm
and broadcast TV stations. Talks over that deal fizzled out.
And News Corp's (NWSA.O) separation of its newspapers, that
will happen in the summer, will include some TV assets in
Australia along with a fledgling education unit.
"I will assume Time Warner will give Time Inc sufficient
cash to continue investing in the digital evolution of the
business," said Alan Gould, an analyst with Evercore.
Sufficient capital or not, several leadership changes over
the past three years have left Time Inc in the lurch with its
digital strategy, analysts and investors say.
Time Inc's current leader Laura Lang, who was named CEO in
2011, will be leaving the company. She replaced Jack Griffin,
who was ousted six months after taking the helm in 2010 from
long-time Time Inc CEO Ann Moore.
"Without effective leadership it will be four years by the
time it spins out with nobody to make the tough decisions about
where to place bets and where not to," said Peter Kreisky, a
former senior advisor to Time Inc and chairman of Kreisky Media,
a media strategy firm.
The problem of finding more revenue from digital products is
an industry-wide issue, not Time Inc specific, to be sure.
"The entire print industry is very weak from a digital
tablet perspective," said Carolyn Dubi, a senior vice president
at IPG-owned agency Initiative.
Dubi cites the difficulty of running ad campaigns across
different digital titles and formats - and difficulty in
measuring effectiveness as hurdles to placing advertising with
Still, Time Warner has had a very successful run spinning
Bewkes has been actively pairing down the company to just
cable networks and its movie studio.
He spun out cable provider Time Warner Cable TWC.N in a
one-for-three reverse stock split of the Time Warner common
stock in March 2009.
The same year, Bewkes unwound the disastrous 2001 merger
with AOL by giving Time Warner shareholders one share of AOL
common stock for every 11 shares of Time Warner common stock.
AOL's stock has climbed since then after initially declining.
"You’ll certainly have your bears out there but there’s
enough people out there who will be interested in the recurring
revenue stream of the subscription value," said Jonathan Boyar,
a principal at the Boyar Value Group which holds shares in Time
Warner and Meredith.
"There will be some people who won't touch it because they
don't want to have anything to with magazines but there’s
certainly going to be a market out there."
(Reporting By Jennifer Saba and Liana Baker New York; Editing
by Ben Berkowitz and Martin Howell)
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