Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

American manufacturing is going to be great, oil is on an upswing and a bidding war might be forming for a stack of magazines. Are we sure it's 2017?

Time Inc., the publisher under pressure to sell itself, has been contacted by Meredith Corp. about a potential merger, Bloomberg's Alex Sherman reported Thursday, adding that other possible suitors have also been in touch with the company. This is after Time rebuffed a takeover offer for about $2 billion from two media investors in October. At the time, I said it was shaping up to be a "take-the-money-and-run" situation. That's even more true now. 

Deal Hope
As you can see, Time shareholders have gotten really excited about the prospect of an acquisition:
Source: Bloomberg

The $1.9 billion company owns some big-name lifestyle and entertainment magazines -- its namesake Time, of course, as well as Sports Illustrated, People, Cooking Light and Real Simple. But time has not been on Time's side. Like most print media, circulation is in decline and the shift to digital has not been an easy one. For the nine months ended Sept. 30, Time's circulation revenue dropped 9 percent, hurt by both lower subscription and newsstand sales. They were down 15 percent for the quarter alone.

The Future of Print
A decade ago, magazine publisher Time Inc. was generating more than $5 billion in annual sales. Analysts see that figure slipping below $3 billion by 2018
Source: Bloomberg

Still, it's not surprising that Meredith is sniffing around again -- it's been doing the takeover tango with Time for years. Back in 2013, when Time was still under Time Warner Inc.'s roof, there were discussions to sell some of the magazines to Meredith, which owns women-tailored names such as Better Homes and Gardens and Fit Pregnancy. Instead, Time Warner decided to unload all of its publications at once, so it went the spinoff route. 

Aside from the magazines, Meredith also owns broadcast TV stations in various U.S. states that it says reach about 12 million households. While those stations generate just one-third of Meredith's total revenue, they drive most of the company's operating profit. Time has lost money on a GAAP basis in five of the past 10 quarters.

Meredith doesn't have much cash to speak of and net debt is more than triple its trailing 12-month Ebitda, so a potential transaction with Time would probably be structured more like a merger of equals. Hypothetically, an all-stock transaction with a relatively small 15 percent premium to Time's closing price Thursday could be about 3 percent accretive to Meredith's earnings next year, according to Bloomberg's merger calculator. 

Pumped Up
Takeover speculation has lifted Time's stock price above what the company may be worth on a stand-alone basis. In other words, if a deal doesn't happen, there will be pain
Source: Bloomberg

Edgar Bronfman Jr. and Ynon Kreiz, who made the October offer, are said to still be interested in a deal, too. Their bid was in the $18- to-$20-a-share range, which won't cut it now that Time is trading at those levels. Worth noting, though, is that at these levels a buyer would be getting Time at a discount to its annual revenue. For comparison, acquirers of U.S. companies in the past year have paid, on average, more than double the target's revenue.

Is a bidding war in store? Potentially. In any case, Time needs to seriously consider its options because the stock probably isn't worth what it's trading at now. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net