Analysis: Once-proud Time Inc seen struggling as independent firm

By Jennifer Saba

(Reuters) - In giving up on its magazine business, Time Warner Inc is set to hand its shareholders an operation that has shrinking sales and profits - and will be looking for a new chief executive.

While the details of the spinoff of Time Inc are still to be announced, the media conglomerate has indicated that it will be structured as a tax-free transaction for its shareholders. It has already previously spun off other businesses to investors, including AOL and Time Warner Cable.

Time Inc faces the same challenges as print publishers everywhere, mainly that people are choosing to read on smartphones and tablets and advertisers are spending the bulk of their budgets elsewhere. As a separate public company, it won't be able to hide behind its media conglomerate parent, and will face scrutiny from investors expecting it to generate free cash flow and stem revenue declines.

"This once proud and profitable division is being punted as its business prospects look structurally challenged," wrote Nomura Equity Research analyst Michael Nathanson in a note about the spin-off on Thursday. Time Inc publishes more than 100 magazines worldwide, including the eponymous newsweekly Time, Sports Illustrated, and People.

Over the past decade, Time Inc's revenue dropped almost 40 percent to $3.4 billion while its operating profit fell in half to $420 million.

Advertising revenue for the entire U.S. magazine industry fell 3 percent in 2012 to $21.07 billion while ad pages declined 8 percent compared to 2011, according to the Publishers Information Bureau.

"You don't have revenue that is stable," said Nathanson in an interview.

For now, Time Warner offers few details about it publishing assets in its results since they represent such a small part of operations - roughly 8 percent of 2012 earnings before interest, taxes, depreciation, and amortization.

Nomura's Nathanson estimates that as a stand-alone company, Time Inc will have an enterprise value of about $2.3 billion, or about $2.50 per share. It is unclear what investors will be willing to ultimately pay for it, though. Time Warner's shares closed on Thursday at $56.78.

"If you can formulate a thesis where the ad declines moderate and the subscription growth starts to accelerate and costs are kept down, it's an asset where you can grow the cash flow," said John Janedis an analyst with UBS.

A source familiar with the company's thinking said that with an optimal financial structure, and the fact that Time Inc has been gaining share in the magazine market, it could be in a position as a consolidator. The company has yet to indicate what its financial structure, and particularly its debt levels, will be after the spinoff.

"As we saw with the prior spin-offs of Time Warner Cable and AOL, we expect the separation will create additional value for our stockholders," Time Warner Inc CEO Jeff Bewkes said in a statement on Wednesday.

Shares of Time Warner have gained more than 50 percent in the last year on the back of strong revenue from its cable assets. Following the magazine separation, it will remain home to pay-TV channel HBO, cable networks TBS, TNT, CNN and movie studio Warner Brothers.

DIGITAL

While other media conglomerates have moved to spin out their publishing assets, Time Inc will be unique as a print-only company, making its transition to having a greater reliance on digital rather than print sales more urgent.

Even Meredith Corp, the media company approached by Time Warner for a proposed merger of some of its magazines, has other faster-growing assets, including a marketing service arm and broadcast TV stations. Talks over that deal fizzled out.

And News Corp's separation of its newspapers, that will happen in the summer, will include some TV assets in Australia along with a fledgling education unit.

"I will assume Time Warner will give Time Inc sufficient cash to continue investing in the digital evolution of the business," said Alan Gould, an analyst with Evercore.

Sufficient capital or not, several leadership changes over the past three years have left Time Inc in the lurch with its digital strategy, analysts and investors say.

Time Inc's current leader Laura Lang, who was named CEO in 2011, will be leaving the company. She replaced Jack Griffin, who was ousted six months after taking the helm in 2010 from long-time Time Inc CEO Ann Moore.

"Without effective leadership it will be four years by the time it spins out with nobody to make the tough decisions about where to place bets and where not to," said Peter Kreisky, a former senior advisor to Time Inc and chairman of Kreisky Media, a media strategy firm.

The problem of finding more revenue from digital products is an industry-wide issue, not Time Inc specific, to be sure.

"The entire print industry is very weak from a digital tablet perspective," said Carolyn Dubi, a senior vice president at IPG-owned agency Initiative.

Dubi cites the difficulty of running ad campaigns across different digital titles and formats - and difficulty in measuring effectiveness as hurdles to placing advertising with tablet editions.

ANOTHER SPIN

Still, Time Warner has had a very successful run spinning out companies.

Bewkes has been actively pairing down the company to just cable networks and its movie studio.

He spun out cable provider Time Warner Cable in a one-for-three reverse stock split of the Time Warner common stock in March 2009.

The same year, Bewkes unwound the disastrous 2001 merger with AOL by giving Time Warner shareholders one share of AOL common stock for every 11 shares of Time Warner common stock. AOL's stock has climbed since then after initially declining.

"You'll certainly have your bears out there but there's enough people out there who will be interested in the recurring revenue stream of the subscription value," said Jonathan Boyar, a principal at the Boyar Value Group which holds shares in Time Warner and Meredith.

"There will be some people who won't touch it because they don't want to have anything to with magazines but there's certainly going to be a market out there."

(Reporting By Jennifer Saba and Liana Baker New York; Editing by Ben Berkowitz and Martin Howell)

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