The long and halting courtship between Meredith Corp. and Time Inc. is finally over and now comes the hard part — turning Time’s ailing print empire into an asset for Meredith, figuring out what titles (if any) to sell off and explaining away the unexpected involvement of the conservative Koch brothers.
Meredith’s $2.8 billion cash deal to buy Time Inc. came after multiple false starts and aborted efforts at dealmaking over the last few years. The purchase price covers Time Inc.’s debt and the deal includes a $650 million equity infusion from Koch Equity Development, the investment arm of Koch Industries.
“Meredith presented us with an opportunity to combine companies to create even greater scale and financial flexibility. Scale matters and will enable the enterprise to compete more effectively in this dynamic media landscape, enhancing the enormous, exciting potential of our brands,” Time Inc. chief executive officer Rich Battista wrote in a rather matter-of-fact note to staff.
“Understandably, whenever a company is acquired there is a lot to digest and the news can be distracting,” he said. “We’ve been dealing with distractions all year long and despite that, I am proud of the focus you’ve maintained and the great work and results that you’ve produced.”
Not surprisingly, Time Inc. said Battista will leave the company when the deal closes in the first quarter of 2018. While his 14-month tenure was one of seemingly endless turmoil at the publisher, he at least succeeded in settling the question mark hanging over Time Inc.’s future — even if the answer was to sell it.
In essence, Meredith is using cash flow from its TV business — and the $650 million from the Koch brothers — to buy Time Inc.’s troubled business to build digital scale and momentum.
Despite the $2.8 billion price on the print-heavy Time Inc. business and the risks of integrating the two companies, investors gave the deal a big thumbs up, pushing Meredith’s stock up 10.7 percent to $67.55 on the New York Stock Exchange Monday.
But the media M&A math remains challenging, and even with Monday’s stock run-up, Meredith has an enterprise value of $3.36 billion — just $560 million above what it’s paying for Time Inc.
Clearly, Stephen Lacy, Meredith’s chairman and ceo — like ceo’s across every industry — is hoping to get a little more of a tech valuation for his company’s tech chops.
“We’re creating a scaled digital business that will rank number six in the U.S. based on user traffic and [that] generated approximately $700 million of digital ad revenues on a combined basis in calendar 2016,” Lacy told analysts on an early morning conference call Monday. “That’s a digital business much larger than many standalone activities that trade at very high multiples in the marketplace.”
At times, the analysts on the call voiced skepticism about the deal and peppered Meredith’s brass with questions on “doubling down” on the more troubled part of its business, but executives replied by underscoring the deal’s virtues, including the cost benefits.
Meredith expects to generate “cost synergies” of $400 million to $500 million in the first two full years of operations. Those savings will come from:
• Eliminating duplicative functions: $240 million to $300 million.
• Real estate and vendor contracts: $80 million to $100 million.
• Circulation, fulfillment and other initiatives: $80 million to $100 million.
That could all lead to some pretty dramatic changes for both Time Inc. and Meredith staffers. Some Time Inc. titles already up for sale are still on the block.
“Time has publicly reported that they have some assets that are currently for sale, the Time U.K., Golf magazine, Sunset and Essence. And we’re going to allow Time Inc. during this — before the close period — to go for it and consummate those transactions, and we think that they’ll have those done by the end of the calendar year,” Meredith’s chief operating officer Thomas Harty said.
On the cost front, chief financial officer Joseph Ceryanec added: “Time Inc. has done actually a very nice job moving a lot of support functions to India, and we really have not. We also have the New York versus Des Moines cost structure benefits. So inherent in a lot of these, you’ve got geographical differences as well.”
Geography is important to the deal in a number of ways. Time Inc.’s lease of its 700,000-square-foot headquarters in downtown Manhattan’s Brookfield Place isn’t set to expire until 2032, although Lacy did note that Meredith has “a very attractive under-market, if you will, lease in midtown” for space that the company occupies. “So we think we’ve got some great profit opportunities there as well,” he said. What that means for Time Inc. staffers is that if Meredith is able to wiggle out of the Brookfield Place lease, they might end up moving back uptown.
Geography also comes into play when it comes to combining the two company’s cultures. The Des Moines-based Meredith is known for its Midwestern approach, as evidenced by its best known titles such as Better Homes and Gardens, while Time Inc. is a cornerstone of the New York media scene, where the involvement of the conservative Koch brothers has raised more than a few eyebrows.
But the investors’ presence at the company will be limited when it comes to operations and editorial, and Lacy said that was a selling points for the arrangement.
“We were looking for some support, but, in all sincerity, not looking for a lot of help in running the business, so that eliminated a number of the players who came around the table,” the Meredith ceo said. “We had a lot of interest in the business, but financially, their terms ended up being the best. And their desire to be passive and not require a board seat and observer rights and all sorts of other things that we learned as we went through the process, without a doubt, made the offer from the Koch Equity division of their company the most attractive.”