Time Warner in talks with Meredith on magazines - source
By Peter Lauria | February 14, 2013 11:00 AM EST
Time Warner Inc
The source, who asked not to be named, said the talks are in the early stages and are "very fluid." The valuation being ascribed to Time Inc, the nation's largest magazine publisher, with titles such as Time, Sports Illustrated and People, ranges from $2 billion to $3.5 billion.
A report in Fortune magazine, one of Time Inc's titles, said a meeting with a potential buyer was scheduled for today.
A Time Inc representative did not immediately return a request for comment. A representative for Meredith declined comment.
Under one scenario being discussed, Meredith would acquire all the Time Inc titles outside of news and sports. These would include In Style, Real Simple, and People, all of which fit with Meredith's focus on magazines oriented toward women.
In a research report issued late on Wednesday, UBS analyst John Janedis estimated Time, Sports Illustrated and Fortune account for less than 10 percent of Time Inc's EBITDA, or earnings before interest, taxes, depreciation and amortization. Stripping those titles out, Janedis placed Time Inc's value at between $2.4 billion and $2.9 billion.
Meredith's 14 titles include Family Circle, Ladies Home Journal, and Better Homes and Gardens. It also owns l2 local TV stations and has a marketing agency. For the six months ended December 31, it reported revenue of $714 million and about $24.7 million in cash and cash equivalents.
The source said Time Warner sees an upside to retaining Time, Sports Illustrated and Fortune, iconic brands that are among the leaders in their categories. The conglomerate thinks it also could leverage those titles into ancillary businesses such as conferences.
In another potential scenario, Meredith and a private equity firm would team up to buy Time Inc's magazines and fold them into a newly created independent company in which each would hold a stake, said the source. Partnering with a private equity firm would give Meredith an infusion of cash to help finance the deal and capitalize the new company. Time Warner could also retain a stake under that scenario, the source said.
"That would allow the private equity firm to sell its stake down the road for maxim value," said Reed Phillips, chief executive and managing partner of DeSilva+Phillips media investment bank. "In this case, because Meredith is public, private equity may take an ownership stake in Meredith (directly)."
Early in his tenure, Time Warner CEO Jeff Bewkes decided to slim down the company's corporate structure to just cable networks and its movie studio. In rapid succession, he spun off AOL and Time Warner Cable
Investors have been pushing Bewkes for years to do the same with Time Inc, which they considered at best a slow growth and at worst a no-growth asset in a conglomerate that also includes cable networks TNT, TBS, HBO, CNN and the Warner Bros. film studio.
Magazines and newspapers are dealing with declining advertising revenue as readers and advertisers migrate to digital formats.
In 2012, revenue at Time Inc dropped 7 percent to $3.4 billion on declines in advertising and subscription sales. Operating income fell 25 percent in the same period.
Time Inc announced in January it planned to cut about 500 jobs, or about 6 percent of its workforce.
Despite those numbers, Time Inc's 2012 share of overall domestic advertising of 21.5 percent led the industry, up from 21.0 percent in 2011, according to Publishers Information Bureau data.
One of the issues holding Bewkes back has been legacy, given that much of the company's identity is wrapped up in its magazine business, the foundation on which the modern day Time Warner is built. Former Editor in Chief John Huey once said that he couldn't imagine a time when Time Warner didn't own Time magazine.
But a far bigger obstacle preventing a deal has been taxes. Because Time Inc was built over a long period of time, it carries a low tax basis, meaning that a straight sale would result in a heavy tax hit for Time Warner.
The most attractive part of the deal structures under discussion is that they would allow for financial engineering that could result in a tax-free transaction.
News of the potential deal comes as News Corp moves to complete a separation of its publishing assets from its entertainment properties before the end of the year.
Time Warner shares closed regular trading on Wednesday up 35 cents at $52.85. Meredith shares ended Wednesday's session down 5 cents at $37.98.
(Additional reporting By Jennifer Saba in New York; Editing by Gerald E. McCormick, David Gregorio and Steve Orlofsky)
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