Time Inc. Spin-Off Likely Delayed to Second Half of 2014

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The spin-off of publishing company Time Inc. by its parent, the entertainment company Time Warner Inc. (NASDAQ: TWX), will most likely be delayed until the second half of the 2014, according to two sources familiar with Time Warner’s plans. Time Warner CEO Jeffrey Bewkes recently set the date for sometime in the second quarter.

The primary reason for the delay is that Time Inc. will post poor financial results for the fourth quarter of 2013, and new management is considering several options to reverse that trend in the new year. Time Warner executives do not believe that the results of a major restructuring to lower expenses, or an acquisition that would add revenue to Time Inc., will be financially evident until the second quarter of 2014 is released to the public, or later. And management would like Time Inc. to report its initial quarter as a public company free of significant special charges due to layoffs or the purchase of another business.

The lack of the any progress in the turnaround at Time Inc. was evident when Time Warner reported third-quarter results. The magazine division’s revenue fell to $818 million in the third quarter from $838 million in the same quarter a year ago, which is part of a pattern that extends back at least to 2008, according to a recent document filed with the U.S. Securities and Exchange Commission (SEC) by Time Inc. Operating income for the third quarter fell from $127 million in 2012 to $115 million in the most recent period. Probably the most disturbing part of the earnings news was this: “The decrease in Advertising revenues was mainly due to lower non-magazine advertising revenues, including website revenues.” Time Warner did not separate performance of online from print ad revenue, but it appears to have lost ground in both.

Several premier print journalism companies have based their future successes on the belief that online advertising revenue growth eventually will replace attrition in print advertising. Time Inc. is not alone in suffering from the effects of poor digital advertising performance, even when the print properties involved are major brands. The New York Times Co. (NYSE: NYT) reported that its digital advertising revenue fell 3.4% in the third quarter of this year. Compounding the problem, Time Inc. websites do not have the leverage with advertisers that the very largest online properties do. None of Time Inc.’s three large weeklies — Time, People and Sports Illustrated — is the leader in its category based on visitor audience size.

Very few observers of the premium digital and print content businesses believe that Time Inc. can increase its revenue in 2014 strictly through “organic growth.” One option that Time Warner management and new Time Inc. CEO Joe Ripp have to increase operating income is to sharply reduce staff. Earlier this year, Time Inc. fired about 500 workers, and it saved millions of dollars in expenses per year in the process. However, even if Time Inc. sets layoffs of another few hundred workers in early 2014, all management will do is continue chasing falling revenue downward by regularly lowering costs. Time Warner executives and Ripp likely understand that is not a sustainable long-term strategy.

That leaves the only viable long-term strategy which has promise as mergers and acquisitions. Time Inc. did buy American Express Publishing recently. However, the revenue of the publisher of Travel + Leisure and Food & Wine is too insignificant to affect Time Inc.’s sales by any meaningful measure. Time Inc. has limited options if it wishes to make a large purchase within its own industry. Early this year, publisher Meredith Corp. (NYSE: MDP) had talks with Time Warner about buying most of Time Inc. Time Inc.’s management may have considered buying Meredith, but the market cap of the publisher of women’s magazines, which also holds broadcast properties, is $2.29 billion. Time Inc. would need to offer a large premium to the current share price to convince Meredith’s board that such a deal would be fair for shareholders. And Time Inc. is unlikely to gamble that sum of money to improve its revenue moderately. Alternatively, Time Inc. could try to buy Meredith’s magazine assets.

The only other two large magazine publishers in the United States are Hearst and Conde Nast, each of which is privately held. And, Time Inc. has been mentioned as a potential buyer of a smaller privately held publishing firm — Forbes. The business magazine is for sale for $400 million, although media industry analysts believe the eventual sale price could be as low as $200 million. Forbes offers Time, Inc. an example for a potential change in editorial philosophy.  Forbes management values the content produced by its writers, bloggers, and advertisers as equally useful to readers, which is a sharp deviation from traditional, mainstream editorial practices.

Time Inc. management also is struggling with two other problems on which Ripp would like to make progress in the next several months, according to a number of sources who work for the publisher or are employees of partners. These issues are the new structure of its editorial operations, in which the editors of its magazines report to business executives and not a corporate editor-in-chief, and the delicate separation of is Web properties from those of CNN. CNN is part of Time Warner, and it is widely assumed that the online joint ventures between the two companies will end when the spin-out of Time Inc. from Time Warner is complete.

Time Inc.’s traditional editorial structure, which dates back to founder Henry Luce, was that the editors of the company’s publications reported to an editor-in-chief. The person who held the position was considered independent of the business interests of Time Inc. While this tradition did not necessarily apply to decisions about editorial budgets, it did to the ability of journalists to cover subjects without interference from Time Inc.’s advertising and circulation executives.

Time Inc.’s last editor-in-chief, Martha Nelson, was pushed out in October. Under a new structure, magazine editors will report to the presidents of Time Inc.’s three major publishing groups. Former Time Inc. editor-in-chief Norman Pearlstine has returned as executive vice president and chief of content. However, in his new role, Pearlstine does not oversee or control the activities of Time Inc.’s editors at all. In Ripp’s memo about the changes, he wrote, “We believe effective collaboration across business and editorial lines is imperative if we are to succeed as an independent company.” However, the new structure has caused considerable consternation among Time Inc.’s senior editorial staff, who think they will lose much of their ability to choose content that they believe is most useful to readers.

Equally difficult as the issue of editorial independence is what will happen to joint ventures between Time Inc. magazine online operations and CNN.com. As an example, for many years, Fortune.com and Money.com have been under the umbrella of CNNMoney.com. Neither of these Time Inc. properties has any traffic of its own to speak of. Time Inc. will need to not only build independent Web operations for Fortune and Money (sources say that this process will begin in late May), it will need to drive readers to them in the extremely crowded online business and financial sector. This sector includes the financial content sites of the AOL Inc. (NYSE: AOL), Yahoo! Inc. (NASDAQ: YHOO) and MSN, as well as the sites of news services Reuters and Bloomberg. It should be pointed out that Time Inc. and CNN did severe their Sports Illustrated partnership in the second quarter of 2012, apparently with satisfactory results for Time, Inc.

Time Warner and Ripp have decided to buy themselves more time, because they think Time Inc. can be retooled enough to make it attractive to public company investors after the middle of next year. Bewkes hoped to accelerate the process when he set a spin-off deadline for the second quarter of 2014. However, in doing so, he underestimated how long it will take to transform Time Inc. into a venture that approaches the success it had before the recession. Ripp, who needs to solve several serious problems, has less than six months to cut costs extensively or make a major acquisition. He has to be able to take something to Wall Street other than the status quo.

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