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Time Warner: It's "Time" For Downsizing Again

 February 15, 2013 02:59 PM

(By Mani) Media and entertainment behemoth Time Warner, Inc. (NYSE: TWX) is rumored to be mulling options for the majority of its magazine assets and is in talks with Iowa-based Meredith Corporation (NYSE: MDP), which publishes popular magazines such as Better Homes and Gardens and Family Circle.

In the early 2000s, Time Inc. division published about 150 titles worldwide and was the leading magazine publisher in the U.S. and UK. As of Dec. 31, 2011, Time Inc. published 21 magazines in print in the U.S. and over 70 magazines outside the U.S.

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If the rumors are to be believed, the divestiture of Time, Inc.'s suite of magazines would end an era, leaving only the film company Warner Bros. Studios and TBS, TNT, CNN, and HBO cable networks with Time Warner.

Wall Street has been urging Time Warner to explore options for the publishing business, whose revenue has been flat to down in each of the last four years and accounts for only 11 percent of total revenues. The company's cable networks and film division represents 47 and 42 percent of its revenues.

In fiscal 2012, the publishing unit's revenue dropped 5 percent to $3.44 billion, with profit falling 18 percent to $590 million. Last month, the company said it would cut 500 jobs, or 6 percent of the workforce as newsstand sales and advertising continued to decline.

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Time Inc.'s magazines reach more than 110 million Americans each month, derives approximately half of its revenues from the sale of advertising, primarily from its print magazines with a smaller amount of advertising revenues from its websites and the tablet editions of the magazines.

But, the segment's fundamentals are expected to decline over the next several years due to industry wide declines in ad sales for print compared to Internet, which is cheaper than magazines and newspapers. With the advent of tablets and smartphones, advertisers are willing to spend more on those devices rather than magazines.

While magazines have been somewhat more resilient to secular print pressures, it is not immune. That being said, Time Warner has taken substantial costs out of the business, over $750 million since 2008, to mitigate the revenue declines. Still, the segment cannot prevent high single digit declines in EBITDA over the next several years.

"With publishing operating income likely to erode by approximately 50% from 2007 - 2012, and the expectation for the segment to struggle in order to grow vs. the rest of Time Warner's portfolio, we believe management will at some point look at strategic options for the segment," UBS analyst John Janedis wrote in a note to clients.

Time Warner may follow the path of Rupert Murdoch's News Corp. (NASDAQ:NWSA) (NASDAQ:NWS), which announced the spin off its newspaper/ publishing assets a couple of months ago.

News Corp.'s publishing unit, which lost $2.1 billion in fiscal 2012, would be spun off as a separate company later this year after Murdoch succumbed to pressure from investors who didn't want to see the publishing unit be a drag on the media conglomerate's television and film divisions, which will be renamed Fox Group.

Time Warner could choose a similar path to unlock value, given that the market ascribes little to no value for the segment.

Reports suggest a sale would exclude three publications: Time, Sports Illustrated, and Fortune. The deal is speculated to include People, InStyle and Real Simple titles.

"We estimate these three magazines account for less than 10% of the EBITDA of the publishing segment. Assuming a 5-6x multiple on90% of our ‘13E EBITDA ($487M, excl. $60M charge), we arrive at an asset value of $2.4-2.9B," Janedis noted.

Interestingly, Meredith too is not in a great shape to buy Time's assets. For fiscal 2012, Meredith's revenue fell about 2 percent to $1.38 billion, with profit slipping 18 percent to $104.4 million. It has about $25 million in cash and cash equivalents as of Dec.31, 2012. A New York Times report noted that Time Warner may ink a joint venture with Meredith rather than selling the business.

Whatever the case, it would be good news for investors as the company may get rid of part of its worst-performing business. Moreover, the proceeds from the sale could be used to buyback shares while improving the EBITDA and valuation of Time Warner.

New York-based Time Warner continued to shrink in size post its merger with AOL in 2000, when it was once a $350 billion market-cap company with interests in nearly every aspect of entertainment, including television, music, film, books, the Internet, cable systems and sports teams.

The disastrous $164 billion merger with AOL shattered the company leading to the spin-off of AOL, Inc. (NYSE:AOL) and Time Warner Cable, Inc. (NYSE:TWC) in to separate public entities in 2009.

On the other hand, Warner Music Group was sold in 2004 to a group of investors led by Edgar Bronfman Jr and Time Warner Book Group was sold to French publisher Hachette Livre, of the Lagardere group in 2006, which also saw the sale of Turner South sports channel News Corp's Fox Cable Networks group.

Now, the company's market cap is mere $50 billion, with shares trade at 14.4 times its 2013 consensus earnings estimate. They were trading between $33.62 and $53.89 during the past 52-weeks.



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