Time Warner: Is it Time to Dump Time Inc.?Jon Fine
By announcing plans—finally—to spin off AOL, Time Warner (TWX) CEO Jeffrey Bewkes has dealt with one longtime problem child. But another remains in the fold, one that complicates matters by lending its name to the corporate moniker. What to do with Time Inc.? It's America's largest magazine group, posting operating income last year of $779 million on revenue of $4.6 billion, and it owns titles as important to consumers and advertisers as People, Fortune (a BusinessWeek competitor), In Style, and Sports Illustrated. But these days "largest magazine group" is not a description you want appended to your company. Time Inc.'s ad revenues shrank 30% in this year's first quarter, compared with the year previous, after falling 20% in the last three months of '08.
The rhetorical flourishes offered by Bewkes regarding Time Inc. make it clear that the company is leaving all options open. In a late April earnings call, Bewkes said the future Time Warner "may well include publishing, but we're not making a religious statement about it either way at this point." (At that time, the company also warned that second-quarter trends looked similar to those of the first.) Time Warner's finance chief, John Martin, was marginally more supportive in early June, saying at an investor conference that "today we have no intention and no current thinking of doing anything with the publishing business.... It's really hard to make a macro call on the state of that business in the midst of this cyclical downturn" for magazines.
That last bit masks a crucial point in wishy-washy words. The current environment for selling all of Time Inc. is terrible. And before you sell, you'd want to know how much of the current bad news comes from a temporary ad downturn and how much comes from permanent structural change in the media world. The exact proportion of each remains uncertain. Also: Got buyers? No. All comparable companies are in various stages of intense pain. According to Nielsen, national magazine advertising dropped 20.6% in the first three months of the year. The debt markets still rule against private equity firms making big bets on media, especially print media, right now. As does simple skittishness in those quarters: Many of the big private equity media deals made in the last months of the credit bubble have gone kablooey into Chapter 11, or threaten to do so.
That leaves a partial sale or a full spin-off. The latter is clearly a favorite toy of Time Warner under Bewkes and is how the company chose to deal with both Time Warner Cable (TWC) and AOL. But a partial sale also has adherents among close observers of the company. Time Inc. split its U.S. properties into three operating units last October: news, lifestyle, and style and entertainment. Each, a former insider says, is operated separately enough to have its own profit-and-loss statement, so any unit could be hacked off from the whole fairly neatly. (A company spokeswoman would not confirm or deny this.) The most obvious sale candidate? The lifestyle unit, which includes Real Simple and This Old House. The group could be attractive, as a purchase or a joint venture, for Hearst Magazines or Meredith (MDP), and, unlike the other Time Inc. units, it's less likely to be seen as a content feeder to other key Time Warner properties. (Read: CNN, for one.) Also ripe for a sale: the company's U.K. unit IPC Media. A Time Inc. spokeswoman and a Time Warner spokesman declined to comment on potential scenarios for the magazine unit.
I've argued in this space against Time Warner's stasis and slow-motion sensibility, but in this case moving slowly makes some sense. There's the hope, however faint, of a bounceback when the economy recovers—Time Inc. leads its sector, while AOL was always a laggard—which would help both earnings and the company's potential deal value. Time Inc. isn't helping Time Warner, but its presence is small enough not to hurt its stock price much, if at all. A spin-off won't happen quickly: This is a company that likes such deals to happen sequentially, not simultaneously, as the timing of its Time Warner Cable and AOL moves show. The problems at Time Inc. aren't going away, but the smart money says the unit isn't either, at least not yet.