June 5 (Bloomberg) -- Time Inc. debuts tomorrow as the only publicly traded company in the U.S. focused just on magazines, putting even more pressure on the publisher to adapt quickly to the Internet.
The company, set to spin off from parent Time Warner Inc. after the close of trading tomorrow, will face unique challenges on its own. Unlike other media companies that own other business lines, it doesn’t have the help of assets such as a TV station or a book unit that might shore up its still-falling advertising and circulation revenue. Instead, Time Inc. must rely solely on the popularity of its titles, such as Sports Illustrated or People.
“They’re really an unusual entity in that way, and they won’t have the same cushion as others,” said Ken Doctor, a media analyst with Outsell Inc.
The company will therefore have to innovate faster than its competitors, a tough prospect for an almost century-old publisher with about 7,700 employees. Chief Executive Officer Joe Ripp, known more for his financial acumen than his Web savvy, has cut staff and is investing in digital talent to build online businesses around Time Inc.’s well-known magazine brands.
Going solo does have some advantages. New York-based Time Inc. will be able to invest profits in its own business rather than kicking them up to Time Warner. The publisher had free cash flow of $384 million last year, and could use similar funds this year for possible acquisitions or other investments.
Time Inc. is also looking for areas in which it could further cut costs, including staffing, according to people familiar with its plans. They asked not to be named because the strategy is confidential. Last year, the company slashed 500 jobs, or about 6 percent of its workforce, and more could come.
Teri Everett, a spokeswoman for the company, declined to comment on its plans.
Time Inc. shares are already being valued at about eight times last year’s profit, based on its net debt and its trading in the when-issued market, where shares are bought and sold among a limited pool of investors. Competitor Meredith Corp., which publishes Better Homes & Gardens and also owns TV stations, trades at 10 times its earnings for the most recent four quarters, showing the value investors assign to assets beyond magazines. Meredith shares have climbed 14 percent in the past year.
Two publicly traded newspaper companies offer signs of hope for Time Inc. News Corp. has climbed 15 percent since splitting from Rupert Murdoch’s entertainment properties last year. New York Times Co. is up 50 percent in the past year on gains in online subscriptions.
For now, Time Inc. will have to rely almost entirely on advertising and subscription sales -- and those results haven’t been pretty. Advertising fell 6 percent to $1.8 billion in 2013, compared with two years earlier, while newsstand and subscription sales plummeted 11 percent to $1.1 billion.
The company, which will begin trading next week under the ticker symbol TIME, expects another drop in sales this year by as much as 5 percent, excluding the magazines it acquired from American Express Co. in September. It’ll also have to make payments on $1.4 billion in debt it raised for the purposes of the spinoff. About $590 million of that amount will be used to fund a one-time dividend payment to Time Warner shareholders.
While News Corp., Meredith and magazine publisher Hearst Corp. have had similar declines, they’ve been helped by their TV and books businesses, which have made up for the advertising shortfalls that have afflicted the entire industry. Meredith, which gets 26 percent of its sales from TV stations and the rest from magazines like Better Homes & Gardens, reported a 6.9 percent gain in total revenue last fiscal year.
Time Inc.’s market value for the moment stands at about $2.57 billion, based on when-issued trading. Adding in its proposed net debt, the company’s enterprise value would top $3.87 billion.
Ripp is already making moves to expand beyond the traditional subscription and advertising businesses. Time Inc. said this week it acquired startup Cozi Inc., a household scheduling application, for an undisclosed amount. The company is also working on a streaming sports site called 120 Sports, a joint venture that also includes the major U.S. baseball, basketball and hockey leagues.
Time Inc. has spent money to create video programming and is redesigning its websites to work better across digital devices like smartphones, an increasingly popular way to read news content. Online video could lure marketers who are willing to pay much higher ad rates for video ads than for flat banners.
Still, the company has a long way to go to shift its culture toward digital media.
“They’re still playing catch-up,” Doctor said. He cited the company’s latest redesign of Fortune.com, which was recently split off from CNNMoney.com, the finance site owned by Time Warner that was a major source of Web traffic for the publisher.
“It’s smartphone ready, but it’s kind of traditional -- what does it really do differently?” Doctor said.
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