by Will Ashworth | February 21, 2013 9:15 am
Speculation was rampant last week that Time Warner (NYSE:TWX) and Meredith Corp. (NYSE:MDP) were in serious discussions to combine their consumer magazines into a separate, publicly traded company.
So far, it looks like the first move would be to combine the two entities under the moniker Meredith Publishing. Time Warner shareholders would own two-thirds of the business, with Meredith shareholders owning the rest. Time Warner would then sell the remainder of its magazines to the highest bidder.
With print media seriously in the doldrums, the move appears odd at first glance. However, upon closer examination, it makes all the sense in the world.
Let’s take a look at three reasons why.
1. Odd Man Out: Head to Time Warner’s homepage and the first thing you’ll see is a tab entitled “Our Content,” which lists its four operating segments: Turner Broadcasting System, Warner Brothers Entertainment, Home Box Office and Time Inc. Remember the Sesame Street song “One Of These Things Is Not Like The Others?” It’s pretty clear Time Inc. is the odd man out.
That’s not to say that it doesn’t have a role in the overall business, but more than anything, it’s clearly just part of the legacy. And on top of that, investors have a hard time understanding its value. By getting rid of the magazine business, Time Warner could drop this deadweight and change its name to Warner Entertainment or some other more appropriate handle. (In fact, Meredith could do the same — creating Meredith Communications for its television stations).
2. Size and Scope: While specific details of what’s being discussed are somewhat murky, it’s thought that Time Warner is putting up People magazine — its most profitable publication. In 2011, People generated 19% of Time Inc.’s $3.7 billion in revenue. Only Time and Sports Illustrated come anywhere close.
Meredith, on the other hand, brings to the table Better Homes and Gardens and Family Circle magazines, which boast a combined paid circulation of 11.7 million — about three times People‘s. While the magazine industry’s difficulties are well-documented, the size and scope of this combined business provides advertisers with significant reach … especially if it can deliver in the digital arena.
Combined you’ll have a business with approximately (I’m ball-parking given the unknown) $3.7 billion in revenue and $448 million in operating income. If I showed you these numbers and you didn’t know what business it was, you’d probably think they were more than satisfactory.
3. Digital Potential: Unfortunately, you do know what business it is; one where profitability is shrinking. But while the magazine business isn’t booming, it isn’t dead either … and the shift to digital actually comes with the potential for tremendous upside.
See, while the world is going mobile, tablet users are reading magazines far more frequently than readers of either print editions or those on a desktop. As a result, publishers have been busy the last couple of years developing apps for tablet and smartphone users. In 2009, about 40% of magazine publishers distributed content on mobile devices. By 2011 the figure was higher than 80%; today, I suspect it’s above 90%.
Strangely, while Time has offered digital subscriptions for some time, it didn’t join Apple‘s (NASDAQ:AAPL) Newsstand until the middle of last year. Also, so far, magazine publishers seem happy to charge more for digital editions than print versions. If a combined Meredith/Time Inc. wants to thrive, though, it will have to provide reduced pricing for its digital edition. Otherwise, consumers will go elsewhere. A quick look of the top 25 consumer magazines by digital circulation at the end of 2012 lists no titles from either company.
This reality leaves the new potential company with plenty of room to grow. Just consider that for the first half of 2012, digital editions of all magazines accounted for just 1.7% of circulation. That number is expected to hit 10% in 2015. Plus, Time hasn’t completely ignored mobile. Around 15% of its 10 million monthly unique visitors come from smartphones and tablets.
All in all, there is tremendous upside potential in the digital arena. The trick here is being able to monetize it … and a combined, focused business will definitely help that end.
The Bottom Line: Of course, this is all purely speculation; don’t phone your broker after reading this. In the end, I don’t know how the future is going to play out for magazine publishing.
What I do know is that combining the two publishing entities makes sense in an extremely competitive environment … and that Meredith Publishing sure has a nice ring to it.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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