Time Warner has decided, in the wake of talks breaking down with Meredith Corp. over a proposed spinoff company that would house a combination of the two companies’ magazine brands, to form a separate, publicly-traded company on its own. It’s a plan-B move and it’s going to be a rough road going forward.
For one thing, the combined company between Meredith and Time Inc. would have kicked back almost $2 billion in a one-time dividend to Time Warner. Now that’s not going to happen and shareholders are going to have to hope that the Time Inc. spinoff will perform as well or better than TW’s other spinoffs, AOL, and Time Warner Cable. The spinoff transaction is expected to be done by the end of the year.
And that could certainly work. A print-heavy division within the much broader corporate structure of a publicly traded media company was generally seen as a drag, but on its own it might fare better, if it’s got the resources to grow non-print revenues. As Peter Kafka notes at AllThingsD, AOL shares are up 62 percent since the split. Time Warner Cable is down 21 percent, but still paying decent dividends.
Talks reportedly broke down over including Time, Fortune, Money and Sports Illustrated in the combined entity—a condition Time Warner flip-flopped on in the weeks since the story broke that the two companies were in discussion. Time Inc.’s international group, IPC Media, was also cited as a red flag, and potential cultural differences were also frequently cited.
But you could also throw in impatience and leadership push-back. "Meredith is a very deliberate negotiator," speculates a source. "When they acquired Gruner + Jahr, the negotiations took a year, start to finish. [Time Warner chairman and CEO Jeff] Bewkes may have wanted something to happen faster."
And you don’t have to look very far back to the quick ouster of former Time Inc. CEO Jack Griffin—who came from Meredith—to see that Time Inc. management has a sympathetic ear with Bewkes.
"Bewkes seems to be sensitive to senior employees and maybe they were up in arms over Meredith—maybe they’d be up in arms to anybody—but he listened to them in the past when they replaced Jack."
Economics aside, a partner in Meredith could also have helped pull together a new management team for the new company. Time Warner is now on its own on that front—and its history with Griffin and outgoing CEO Laura Lang point to some struggles there.
"Look at the condition of Time Inc. right now," says another source—2012 revenues down 7 percent, operating income down 25 percent. "This is a very hard thing to take public. It’s almost a pure print company. Look at the revenue trends and the operating income trends. You take companies public on the up-swing, not on the downswing. This was a plan B that you go for only if you have to."
And with the new public structure, Time Inc. will have to open its books wider than it ever has before. For starters, investors are going to want to make sure the digital side of the operation is kicking in as much as it can be.
"Time Inc. aside, the print business to strategic investors is not the most attractive space," says the second source. "You look at the industry trends and all the print revenues are trending down. Advertising is down, newsstand is down. A company like the New York Times is filling the bucket with consumer digital revenue, but there are very few companies like that now."
Investors are going to want to know how much of the revenue is digital, which may be an uncomfortable position for Time Inc. to be in since it’s never had to break those numbers out before. When you’re public, everything is open for examination and scrutiny.
Yet, spinning off Time Inc., one way or another, was likely the plan all along, notes Reed Philliips, CEO and managing partner of media investment bankers DeSilva+Phillips. "They probably always had it in the background as another option," he says.
But questions remain on the kind of leadership Time Warner will select for the spin-off. Lang was up against a tough mandate, to be sure. Bewkes was looking for a transformation, and fast.
"I would expect that Bewkes was looking for someone who would come in and have a strategy in mind to transform the business," says Phillips. "An idea on how to stem the losses or increase profits, but at least figure out a way forward instead of continually retrenching and laying off staff."
Transformation in a year’s time is a lot to ask, but you can be sure whoever is next will have that same directive. This time, however, Phillips guesses the choice will be an industry insider. "Look at the example of AOL," he says. "When they spun that out they brought in Tim Armstrong. They would be looking at someone like that—not necessarily from Google, but someone that is prominent in the industry already. And they’re less likely to go outside the industry like they did with Laura Lang."