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Time to separate

by Richard Morgan  |  Published February 19, 2013 at 10:35 AM
No discussion about a tie-up between Time Inc. and Meredith Corp. is complete without referencing the severe culture clash inherent in any such pairing. Forget their common interest in magazine content directed at women. Everybody knows New York-based Time stands for city slickness, whereas Des Moines-based Meredith exudes Midwestern earnestness. Fortunately for both, the tax-free structure some experts consider suitable for this type of transaction -- the Reverse Morris Trust -- can soften cultural differences as well.

According to sources and reports, Time plans to donate all but four of its 21 titles to the spun-off entity, thereby satisfying the RMT condition that shareholders of parent company Time Warner Inc. own the majority of any merged entity. Much smaller Meredith, however, would be free to cherry pick which of its 14 magazine titles it contributes to the combination. This would allow them to manage their brands in groups set up to minimize the culture clash.

All Meredith has to do, basically, is keep its market-cap contribution to the merger below that accorded to Time's spun-off titles. But once that condition is satisfied, tax expert Robert Willens said, "the Meredith subsidiary can contain anything Meredith wants it to contain."

The smart money here has the Midwestern publisher hanging on to its more pastoral publications, such as Wood, Successful Farming and maybe ReadyMade, rather than placing them in a RMT-created vehicle driven by People, Better Homes & Gardens and InStyle. And the segmentation might not stop there.

"They could create different divisions even within the combined company, because it's going to be extremely tough for Meredith to get the Time Inc. people on board," said Martin Walker of the magazine consultancy Walker Communications. "They operate on such different wave lengths, different expense levels and different salary levels."

Doubters about the disparity in corporate cultures need only recall the unhappy tenure of Jack Griffin, who was fired as the head of Time two years ago after a brief six months. Griffin had been wooed to the post after 12 years at Meredith, which he left as president of its National Media Group.

Time Warner chairman and CEO Jeff Bewkes, who executed the coup, even felt compelled to relieve his magazine staff by way of memo. "I regret to inform you that Jack Griffin is leaving his position as Chairman and CEO of Time Inc.," it began. "I concluded that his leadership style and approach did not mesh with Time Inc. and Time Warner."

While that alone has many in magazines cringing at the thought of a Time-Meredith combine, it remains undeniable that select titles at each company have almost perfect counterparts. Consider Meredith's Eating Well and Time's Cooking Light, for starters, as well as Meredith's Fitness and Time's Health. And who can deny the compatibility of Meredith's Midwest Living and Time's Southern Living, Coastal Living and Sunset?

Moreover, once the decision to exit magazines is made, it seems economically wise to execute on it. "It would have been a lot better five years ago," consultant Walker explained, "but [Bewkes] has decided to bail at a time he can still get a fairly decent price."

What that price will be is subject to debate, although UBS Securities LLC analyst John Janedis put it between $2.4 billion and $2.9 billion in his most recent Time Warner update. His analysis reduced Time's Ebitda by 10% to account for the Time, Fortune and Sports Illustrated titles expected to be left behind, then slapped a multiple between 5 and 6 times on the Ebitda that remained.

There are different ways Time Warner can be compensated in exchange for letting go of Time Inc., but tax expert Willens indicated an RMT would work well in this regard, too. "Time Warner could shift a lot of debt to the spun-off company or have the new magazine subsidiary pay it a big dividend," he said. "It can extract a lot cash, tax-free."

Meredith declined to comment and Time did not return calls.

Tags: Better Homes & Gardens | Ebitda | InStyle | Jack Griffin | Jeff Bewkes | Meredith Corp. | People | ReadyMade | Reverse Morris Trust | Successful Farming | Time Inc. | Wood

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