Time Warner-Meredith Deal: Another Brick in the Wall

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Time Warner (NYSE: TWX) is believed to be in advanced stage of negotiations with Meredith (NYSE: MDP) regarding the sale of a vast majority of Time Inc.’s magazine titles.

The talks are likely to result in Time Warner offloading all of the titles except Time, Sports Illustrated, and Fortune. The means titles such as People, InStyle, Southern Living, Entertainment Weekly, and Real Simple will soon have a new owner.

Des Moines, Iowa based Meredith is widely known as the publisher of titles such as Family Circle and the Ladies' Home Journal.

Since Meredith’s market capitalization stands at $1.72 billion as of today, it would not be possible for the company to acquire the titles, which are speculated to be worth anywhere between $2.4 billion and $2.9 billion. Thus, an alternative mechanism is being suggested which would involve the titles to be placed in a new company which would be jointly owned by Time Warner and Meredith.

Time Warner’s magazine portfolio includes 21 titles, although not all are as widely known as Sports Illustrated or Fortune. Publishing is evidently a marginal activity for the media giant, accounting for just 12.7 percent to its overall revenues last year. It is thus, not a surprise that the company wants to get out of the business.

On the other hand, Meredith is deeply into publishing and the economic rationale to such a deal is plenty. However, there may be more to the story. Including revenues generated from all activities such as subscription, advertising, and content syndication, Time Inc.’s publishing business generated a top line of $3.67 billion last year.

This figure has remained stagnant in recent years with total revenues of $3.67 billion in 2010 and $3.73 billion in 2009. What this means is that Time Warner’s vision is not to get out of the magazine business but out of a stagnating business which happens to be publishing.

Time Warner is not alone in its thinking. In fact, it was only last year when Media General (NYSE: MEG) sold 63 of its small and regional newspapers in one go.

Media General was lucky to have Warren Buffett as the buyer who believes there is immense value in the newspaper publishing business. Buffett is widely known as the investor who sees value in businesses where others don’t so there is nothing to be surprised.

It may be sometime down the line when he will show us how to unlock the value but as things stand, publishing business is doomed as 5 year stock price chart of any publishing company will tell. Media General, Inc.  is arguably in much better shape after offloading the newspaper bouquet to Warren Buffett, but that’s because it is no longer in the slow moving publishing business.

The McClatchy Company, Lee Enterprises are other small publishing companies which are finding themselves ill-equipped to address the onslaught of digital media and the changing news consumption pattern of its readers.

As one would guess, this analysis does not put Meredith plans in a very positive light. What’s worrying is that it is going to be a leveraged transaction for Meredith as the publisher does not have the financial muscle to pull off the deal on its own.

This would just work to amplify the positive or negative effects of the buyout. However, the downside of this acquisition not going as planned appears to be much bigger than the possible gains for Meredith stockholders.


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