Analysts say future is uncertain for recently spun-off Time Inc., saying company was a 'drag on the share price of Time Warner,' selling magazines in a digital and multimedia-dominated market, and shows declining revenue in 22 of the last 24 quarters

Aimee Bellah

June 9, 2014 (New York Times, The) – Sometime late next year Time Inc., the company that all but created the modern magazine business, will leave its home of more than five decades, the Time & Life Building in Rockefeller Center, and head to new quarters in downtown Manhattan.

It is a pragmatic move aimed at reducing costs, but one filled with symbolism for a company that is starting over in fundamental ways.

On Monday, the nation's largest magazine publisher will begin trading as an independent company -- stock symbol: TIME -- with an uncertain future.

What was once a jewel in terms of profit and stature is now a drag on the share price of Time Warner, its parent company, and is being spun off with little ceremony and a load of debt. Absent the diversified portfolio of Time Warner, Time Inc. will be going it alone with more than 90 magazines and 45 websites in a market that views print as a thing of the past.

The new entity will start off with $1.3 billion in debt, including $600 million that will go toward a one-time cash dividend to Time Warner shareholders. That stands in stark contrast to Rupert Murdoch's News Corporation, which was given a $2 billion cash cushion when it was spun off into a separate company last year. At approximately three times earnings, Time Inc.'s debt is high-risk, and Moody's has rated it at less than investment grade.

As recently as 2006, Time Inc. produced about $1 billion in earnings, a figure that is now down to $370 million. Revenue has declined in 22 of the last 24 quarters, which has tried the patience of both investors and Jeffrey L. Bewkes, Time Warner's chief executive.

There are few bright spots in the business. Though Time magazine is still profitable, big brand names like Fortune and Entertainment Weekly are not making large contributions. Worse, the celebrity category is down across the industry, hurting People magazine, which produces the bulk of Time Inc.'s profits. Newsstand sales, once a lucrative part of the People franchise, have dropped by almost half in the last five years. Current forecasts show the magazine coming up $25 million short of projections for the year.

Against this backdrop, leaders at the company acknowledge that many of Time Inc.'s most prominent publications will be fighting not just for attention in a crowded media marketplace, but for survival.

''Every stock needs a dream, something to buy into, but what is the dream here?'' said Michael Nathanson, an analyst at MoffettNathanson who used to work at Time Inc. ''What this company needs is new ideas, and I haven't heard any coming out so far. They are highly leveraged, and leverage can be a good thing if you are growing, but that hasn't been that story here.''

It is a stark turn of fortune for a company that was started by Henry R. Luce in 1922, the kernel around which a giant entertainment conglomerate formed. Life magazine introduced the country to bold stories told in photos, and Time magazine became a byword for stature, offering accessible news analysis that is still imitated all over the industry. People magazine christened an era in which celebrities became a kind of American royalty. The company even birthed the premium cable television channel with HBO, which last year earned about $1.8 billion in profits -- and which is staying with Time Warner.

The task of turning around the company has fallen to Joseph A. Ripp, the 62-year-old chief executive hired last September. A former chief financial officer of both Time Inc. and Time Warner, Mr. Ripp is self-confident, decisive and direct, and is considered a keen financial operator. He is not speaking publicly as the spinoff approaches, but he has made it clear to employees and during a recent road show for investors that he did not take the job to bleed the company dry, and that he thinks Time Inc.'s illustrious brand names and its relationship with 150 million Americans -- all of them in its database -- will serve as a platform for growth.

Time Inc. will not have the cash to make splashy acquisitions, but Mr. Ripp appears to prefer to make discrete purchases of assets that can be bolted onto the existing company. Last week's acquisition of Cozi, an organizer app for families that can be integrated into websites at properties like Real Simple, Food & Wine and Cooking Light, is an example of the approach he has articulated.

Mr. Ripp has also set about slashing costs in a culture where liquor carts once rolled in the halls and stories were chased all over the globe at great expense. According to two people with knowledge of the strategy, leaders at the company met with editors of Time Inc. publications last week and told them they were expected to make deep cuts in staffing and other areas -- totaling 25 percent of editorial costs -- in the coming months.

In some respects, the spinoff of Time Inc. is not a surprise. In recent years Mr. Bewkes has relentlessly focused on Time Warner's core business of entertainment and programming, spinning off AOL and Time Warner Cable in 2009. Executives at Time Warner say those moves created billions in shareholder value, with the run-up in Time Warner Cable stock, gains at AOL and improved share price at Time Warner. They predict that Time Inc. will likewise find new life as an independent company.

So far, investors seem to agree. The pre-spinoff price rose to $23.48 on Friday, up from an initial price of $20.75. That would value the new company at about $2.6 billion, according to Bloomberg.

In an email, Mr. Bewkes said: ''I started my career at a Time Inc.-owned company, and its future is very important to me personally as well as for our shareholders. We've worked hard with Joe and his team to create a financial structure that will allow them to thrive as an independent company, and I have every expectation that will happen.''

Still, Time Inc. is being sent off into the world with a less-than-inspiring portfolio. While Time Warner is keeping CNNMoney, a profitable website, the new company will have to pay its parent hundreds of millions of dollars for IPC, a struggling British magazine company that has no other likely buyer. Time Warner's Turner Broadcasting paid $200 million for The Bleacher Report, a digital-only site with great fan loyalty, while Sports Illustrated has languished at Time Inc. Given the debt and lack of growth opportunities, skeptics have suggested the spinoff is more akin to a burial at sea.

''They will be the only pure magazine company out there, and that's not a story that Wall Street will want to hear,'' said Reed Phillips, a media investment banker with DeSilva & Phillips.

The problems Time Inc. will face are not unique in an industry confronting steep challenges. But interviews with analysts and dozens of current and former Time Inc. executives suggest that a series of management missteps, a lack of investment from Time Warner and downsizing in preparation for the spinoff may have added to the degree of difficulty.

Under Mr. Ripp, all manner of cost-cutting appears to be on the table. In almost every meeting with investors and employees, he reminds them that he is constantly reviewing staffing levels. Some of Time Inc.'s magazines could be sold, and the company's real estate holdings could also be reduced, including a large campus for Southern Progress in Birmingham, Ala., and IPC's very valuable headquarters in London.

Turmoil within the company has been chronic. Time Inc. has churned through a series of chief executives over the last four years. Jack Griffin arrived from Meredith in 2010, but was pushed out within six months after employees revolted. Laura Lang, an advertising executive brought in to reconceive the business, never found her footing in 15 months and left last year with a severance of nearly $20 million, which outraged the rank and file.

Frustrated, Time Warner began to explore its options. Tax implications made an outright sale untenable. An attempt to merge Time Inc. with the Meredith Corporation in early 2013 fell through.

Mr. Bewkes had a batch of iconic magazines, but he couldn't keep them, and no one wanted them. With the Meredith deal dead, and with the successful spinoffs of AOL and Time Warner Cable still a fresh memory, Time Warner quickly pivoted to a spinoff.

Mr. Ripp was recruited to take on the challenge. As the former vice chairman of AOL, Mr. Ripp had seen both the possibilities and perils of digital businesses, and his time as a print executive convinced him that historical divisions between editorial and sales were an expensive anachronism. Soon after arriving, he proposed that editors report to the company's business side, and not to the editor in chief, as they had in the past.

That did not sit well with Martha Nelson, the editor in chief who had turned People magazine into a behemoth and started InStyle; she left the company. Other top executives followed, and Mr. Ripp began assembling his own team, including a longtime associate, Jeffrey J. Bairstow, now Time Inc.'s chief financial officer.

The hiring of Norman Pearlstine, 71, a former editor in chief of Time Inc. who returned last year as chief content officer, was viewed as a signal that the integrity of the editorial product still mattered. But employees have complained that in the selection of Mr. Ripp and Mr. Pearlstine, Time Inc. anointed leadership figures tied to the very past it was trying to shed.

The new company will place a much bigger emphasis on video. It has backed 120 Sports, a video start-up that takes a mobile-first approach. People Now, a new entertainment show, and The Chat, from Fortune, will be part of the mix. A video hub called The Daily Cut will pull in content from the various Time Inc. brands.

Magazines will be more closely integrated -- stories from Money will appear on the website of Time, for example. Native advertising -- advertising designed to more closely resemble the content it appears alongside -- is baked into new websites for Money and Fortune, which have been built from scratch now that CNNMoney will belong to Time Warner.

Independence can have significant upsides. For decades, the print division shipped all its earnings to the corporate parent, leaving little money for acquisitions or improvements, a practice that one editor likened to Time Warner pulling up a Brinks truck in front of the building.

Mr. Ripp says he believes that after a string of missed opportunities, Time Inc. has the brands, personnel and wherewithal to thrive. But he has made it clear to the staff that he did not bring any magic bullets when he took over, and that it was up to the magazine operators to rejuvenate their publications. ''I can't fix it,'' Mr. Ripp has said repeatedly in meetings with senior managers. ''You have to figure out a way to fix it.''

PHOTOS: Time Inc., the nation's largest magazine publisher, has been home to highly influential magazines. But revenue for the newly independent company has fallen in 22 of the last 24 quarters.; Joseph Ripp, the new chief executive of Time Inc., has stressed the need for cost-cutting with his editors in the run-up to the company's independence. (PHOTOGRAPHS BY CHESTER HIGGINS Jr./THE NEW YORK TIMES; LISA BERG) (B4)

June 09, 2014, Monday Late Edition - Final
Section: A Page: 1 Column: 0 Desk: Business/Financial Desk Length: 1838 words

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