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Men'sWeek issue 03/07/2013

NO TIME FOR MEREDITH: So much for that. Talks between Time Warner and Meredith Corp. to merge their women’s magazines collapsed Wednesday, both companies confirmed.

Time Warner said it would instead spin off by the end of the year its publishing division, which includes the flagship magazine, Sports Illustrated, People, InStyle and Real Simple. “A complete spin-off of Time Inc. provides strategic clarity for Time Warner Inc., enabling us to focus entirely on our television networks and film and TV production businesses, and improves our growth profile,” said Jeff Bewkes, chairman and chief executive officer.

This story first appeared in the March 7, 2013 issue of WWD. Subscribe Today.

Time Inc.’s ceo, Laura Lang, who had been essentially cast as a lame duck by the talks and had been canceling public appearances recently, is out after a little over a year on the job during which she was widely criticized for having few accomplishments. She will stay on until a successor is identified.

“At Time Warner’s initiation, we discussed combining our National Media Group with certain Time Inc. brands to create a new publicly traded company. “We respect Time Warner’s decision,” said Stephen Lacy, chairman and ceo of Meredith.

The two companies had envisioned a publicly traded company that combined their most prominent women’s magazines, like InStyle and Better Homes & Gardens, into an even bigger entity.

Bewkes has made a habit of unloading businesses he considers to be on the decline, like the Warner Music Group, which was sold in 2003 as the music industry began its long slide.

The publishing division, once thought of as the jewel of Manhattan publishing, had lost its sheen amid industry-wide declines in advertising and circulation. Time Inc. last year had operating profits of $420 million on revenues of $3.44 billion, versus operating profits of $563 million on revenues of $3.68 billion in 2011.

Meredith, which has an estimated market value of $1.7 billion, significantly smaller than Time Inc., has been in an acquisitive streak lately and sought a larger market share among women’s magazines.

“There are natural synergies between our two portfolios,” Lacy said Wednesday.

Obviously that wasn’t good enough. Since the talks were first leaked in mid February, weeks went by without any sign of a deal and by Tuesday afternoon sources said the negotiations had soured over the financial terms of an agreement and the complexity of a joint company. Even before talks formally collapsed, analysts had been skeptical of a deal.

What had seemed at first an unlikely, if logical, marriage ran into several obstacles greater than a simple clash of cultures.

“The bottom line is no one really knows what’s going to be in the joint venture structure,” said David Miller, a stock analyst at B. Riley & Co. who covers Time, before news of the collapsed talks. “[Meredith] can’t afford to buy the whole burrito so there has to be some sort of joint-venture structure. The problem right now is who’s going to control the joint venture? Do they take on a third partner? What’s contributed to the JV, what’s not contributed?”

Miller said Time wants to sell the whole thing, but can’t get its price, which he pegged at five-times earnings before interest, taxes, depreciation and amortization for the last 12 months.

And that price is low compared with the going rates for other media assets. Cable networks fetch 9 to 10 times EBITDA, while film studios go for 8 to 9 times, Miller said.

Meredith, which is over a hundred years old, is a publicly traded company whose bread and butter is broad-appeal, low-key magazines like Family Circle and Midwest Living. It racked up net earnings of $104.4 million and had revenues of $1.38 billion for the year ended in June.

The cost of the proposed merger seemed out of step for the bottom-line-conscious Meredith, said Edward Atorino, an analyst covering Meredith for The Benchmark Company.“Some of the structures that I’ve heard about would require Meredith borrowing a billion dollars,” Atorino said.

“Steve Lacy has run the company very tightly and ‘prided himself’ in public and in print that they’ve maintained a very strong balance sheet. Now, suddenly the new deal requires Steve to borrow a billion dollars. That’s a big change,” said Atorino.

The New York Times also reported the talks had hit an impasse over the future of the four magazines that would have stayed behind in Time Warner.

Still, spinning off the publishing division is a reversal for Bewkes and faces significant hurdles of its own. For years, Time Warner explored the possibility but had ultimately backed off because the tax implications would have been too great. Then there is the whole question of whether Wall Street will embrace a print-centric company in an era of declining ad revenues and circulation. The flagship Time title is understood to earn little, if any profit, while profits elsewhere are largely limited to People and InStyle.

Publicly too, Bewkes had firmly denied the speculation of any spin-off. But, in shedding its magazines, Time Warner is following in the footsteps of News Corp., which also siloed its publishing assets last December, and is loudly declaring it’s now strictly in show business.