Wolff: The once and future Time Inc. is in flux

Time Inc.'s transition in early June from a magazine company owned by the media conglomerate Time Warner to a publicly held independent publishing company may confirm both the sad state of print and yet, at the same time, its particular attractiveness.

Time Warner doesn't want Time Inc., but there are many savvy buyers who do.

For some years now, Time Inc. has been the embarrassing relative in the attic at Time Warner, which has otherwise remade itself into a video company, with cable outlets and a film and TV licensing and production operation. It has fumbled several attempts to get rid of Time Inc., not that long ago the bedrock brand and most profitable part of Time Warner. The latest castoff plan is to create a financial structure — a "tax efficient" one — wherein Time Inc. takes on more than a billion dollars in debt, which it pays out to Time Warner as it exits.

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Time Inc. is then left as an independent entity, forced to figure out how to operate its hundreds of magazines and at the same time pay its approximately $100 million a year in debt service — more than a quarter of its declining yearly profits.

Why would shareholders tolerate this burden? Well, Time Inc.'s shareholders will be, at the point of independence, Time Warner's shareholders. Merely by getting rid of a low growth print company, Time Warner's shares will go up. And getting that billion dollar bump in the spinoff will make Time Warner's stock climb even more. Value in Time Warner rises, as value in Time Inc. sinks. That's the strategy: raise the price of one at the expense of the other.

Time Inc.'s shareholders, fully aware of the company's peril, and having already benefited from a rise in Time Warner stock, will likely dump shares in the magazine company, dragging its price down.

In this fraught circumstance, Time Inc. has to do nothing less th! an cut costs by firing lots of people, sell non-core assets to reduce its debt as quickly as possible and forcefully offer a vision of how an old-line publishing company can be an attractive investment in a new world.

Many private equity firms believe they do that sort of work more efficiently — and, buying the company at a distress share price, more profitably. They can fire people faster. They can market assets better. And, by taking the company private, they don't have to worry about the vision thing. Publishing companies are roughly worth something close to five times their profits (minus debt), so at a share price that values the company lower than that, it's a beautiful deal.

Here's the counterintuitive thing about dying print: It still has a lot of cash flow — almost $400 million at Time Inc. While the huffers and puffers tell each other that digital media — with pitiful revenue and significant losses — is the future, print, even as a shadow of its former self, throws off major dough. And if you continue to cut a half-century's worth of fat, it will throw off even more.

Indeed, Time Inc. has long been a private equity dream. Norman Pearlstine left his job as its top editor to take up a post at private equity titan Carlyle Group, in part in anticipation of such a sale. But Time Warner, for reasons of sentiment and stasis, held the company longer than it should have — enough time for Pearlstine to leave Carlyle, go to Bloomberg and now return to the top editorial post at Time (where, filings show, he makes $900,000 a year).

Time Inc. may no longer be a coherent idea, or an efficient one — which, together with its debt, will help sink its value — but it continues to have, as they say in private equity, "lots of good assets," meaning the sum of the parts is potentially greater than the whole.

It's a parlor game. IPC, one of Britain's biggest consumer publishers, which Time Inc. owns, might go to German publishers Burda or Bauer. Sunset and Southern Living, ! which Tim! e Inc. acquired in the 1980s, could go to Meredith, which briefly tried to buy the whole company a few years ago. InStyle, throwing off $30 million a year, to Hearst or Conde Nast. Entertainment Weekly, probably no better than break even, to The Hollywood Reporter (its parent, Guggenheim Partners, is a potential bidder for the whole company). Sports Illustrated (in the nineties throwing off $100 million, and probably down to a third of that now, with as much as half coming from swimsuit issue) to ESPN. Fortune, at $8-$10 million, to The Wall Street Journal. There is even interest in Life and its archives and brand, though it hasn't published in an epoch. Time magazine itself probably doesn't have a happy fate. People, on the other hand, making a billion a year, throwing off almost $300 million, is virtually a stand-alone business.

Time Inc.'s new managers, few wedded to the company's legacy, will find themselves as reasonably neutral brokers. They can try to run the company under difficult circumstances — managing debt while trying to convince investors, contemptuous of print, that their print company is something other than print (platform agnostic…yum). Or take an offer, perhaps in short order, from a private equity firm at a price that gets them out with dignity and then some.

If not private equity, then Rupert Murdoch. His new stand-alone print company, News Corp., was divided from his entertainment company, 21st Century Fox, with cash instead of debt. With Time Inc., he could have his yet enduring dream, a print colossus.

The opportunity here is created because Time Warner has crippled its namesake, and because Time Inc. gave up on itself a long time ago. And, too, because the conventional wisdom finds print pathetic and laughable, giving it a rust belt value, and is betting on digital media, which — pay no attention — can't seem to earn any money at all.

Print is the hopeless past, but one left with enough cash flow to be somebody's excellent future.