What Wall Street Thinks About Time Inc., News Corp. Splits (Guest Column)
A top analyst writes for THR about what will have to happen for spun-off print media to shed its risky, "ugly duckling" reputation.
This story first appeared in the March 29 issue of The Hollywood Reporter magazine.
Time Warner CEO Jeff Bewkes' career has revolved around HBO, Turner Entertainment and its lucrative Hollywood divisions. Nonetheless, Bewkes likely feels an imperative to afford the company's print media company Time Inc., especially its historic magazines Time and Sports Illustrated, a chance for continued relevance when it is spun off.
How so? First off, he can find more than a caretaker successor to short-lived Time Inc. CEO Laura Lang. And the position might be more intriguing to candidates if there is a blank slate -- that means no crippling debt. Digital subscriptions have not stemmed sales erosion at Time Inc., but they remain the key to long-term success, so investing there makes sense. The fusion of video and print also deserves attention.
Taking a private-equity mentality by immediately extracting cash might be best for current shareholders, but only if Time Inc. truly is collapsing; or alternatively if after separation a merger or sale is optimal to retain value. The magazine business is in such flux that maintaining more than three times debt to cash flow likely is inappropriate.
News Corp. is similarly planning to spin off its print assets in June. The Rupert Murdoch company, owner of the profitable Wall Street Journal and not-profitable New York Post, is providing $2.6 billion in cash and no debt, meaning it will be capitalized to emerge as the pre-eminent print media survivor with latitude for acquisitions. News Corp. will have a vastly larger scope than the new Time Inc., with real-time information service Dow Jones especially adaptable for pay walls, a high-potential (albeit risky) education business led by former New York City schools chancellor Joel Klein and historic U.K. and Australian newspaper mastheads. The initial market valuation is apt to largely reflect Dow Jones and the Consolidated Media Holdings business in Australia, with discounts or even negative values attached to the scandal-laden U.K. newspapers.
Who will invest in the new companies? Many inclined toward the stocks might be looking for specific events like M&A. (News Corp. would be a buyer and Time Inc. a seller.) The two companies doing a deal themselves seems unlikely, though Murdoch could pounce if Time Inc. devolved into a distressed situation and he felt he could revive the titles.
Both stocks are fairly risky. News Corp. could surprise, as CBS Corp. did when it was split from the bigger Viacom -- though the market certainly will not immediately approach it as a growth name. Time Inc. might be more of an ugly duckling given that its value will be about $3 billion or lower, with few comparable companies other than Meredith, the publisher with which Bewkes explored a joint venture. That company at least boasts a lifestyle orientation that affords advantages for a magazine company.
Matthew Harrigan is an analyst with Wunderlich Securities.