There have been rumors recently that Time, Inc., the Time Warner (TWX) publishing division and the largest magazine operation in the country, might be spun off to shareholders in much the same fashion that AOL will be toward the end of the year.

What is Time, Inc. worth? Probably $3.5 billion, unless TWX management decides to cut costs at the operation to significantly improve margins. In the first quarter of the year, Time, Inc. did a bit worse than breakeven on $822 million in revenue. Assuming some pick-up in advertising revenue in the last quarter of the year, the company will probably have 2009 revenue of $3.5 billion and operating income of $250 million.

Time, Inc. has about 125 magazine titles. The majority of the company’s revenue comes from its big weeklies, Time, Sports Illustrated, People, bi-weekly Fortune, and In Style. With the exception of People, advertising pages at these large titles are running down more than 25% compared with 2008 and several had sharp drops last year as well. Time, Inc. has a number of very small magazines and most of these will never make any significant money. It is hard to see what value titles like This Old House, Essence, and some of the Southern Progress titles have for the overall operation. The elimination of some of these magazines and the overhead costs that go with them might improve Time, Inc. margins if the move was accompanied with more cost cuts at the larger magazines.

The only public company that is a reasonable proxy for Time, Inc. is Meredith (MDP), which has a market capitalization of $1.3 billion and $325 million in long term debt. That leaves its enterprise value at about $1.6 billion. Meredith has annual revenue of about $1.5 billion, a little over 80% of that from magazines and the rest from broadcast. The margins on the broadcast business are modest. Publishing operating margins are 16%.
Meredith trades for 1x revenue of market cap less long-term debt. If this multiple is applied to Time, Inc. its enterprise value would be $3.5 billion.

What is impossible to calculate is the premium that Time, Inc. would carry because of the prestige of it largest titles. Paying large premiums for prestigious properties was certainly part of the transaction value when News Corp (NWS) bought Dow Jones, but the Murdoch-run company had to write a good deal of the purchase price down, an indication that the News Corp accountants  believed that Dow Jones is worth less than half of what the parent paid.

In the current market, operating at breakeven or slightly better for 2009 and with revenue falling at a pace of more than 20% quarter over 2008 comparable quarter, it is hard to make the case that Time Warner would get more than $3.5 billion for Time, Inc. unless the current credit market improves substantially or the company goes through a significant restructuring.

Douglas A. McIntyre

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