Time Warner (NYSE:TWX) is reportedly in talks to divest its publishing business that boasts of well-known magazines such as Time, People, Fortune, Sports Illustrated, InStyle and others. This move looks similar to that by News Corp (NASDAQ:NWS), and the secular trend of declining magazine advertising business could be one of the reasons behind this. If the company completely sells this business, we estimate that the selling price could be around $3 billion.
Based on our expectations regarding future profit growth of the publishing business, we estimate that this business constitutes just about 4% to Time Warner’s value, implying a valuation of close to $2.5 billion. However, on a standalone basis, debt could be lower as indicated by lower capital expenditure requirements and the business could command a higher valuation.
Publishing Business Is Declining
Time Warner’s publishing revenues have steadily declined for the past few years. From about $4.6 billion in 2008, these revenues came down to close to $3.3 billion in 2012.  The decline in print media is an industry-wide trend and the growth in digital sales hasn’t been able to compensate for this. Even though there may be some improvement as Time Warner better monetizes its digital version of magazines, the overall distribution of ad dollars and availability of compelling content across the Internet may reduce the appeal of magazines.
On the other hand, Time Warner’s cable networks are doing exceedingly well. The company grew both its advertising and subscription revenues at a healthy rate in Q4 2012 and outshone peers such as Viacom (NASDAQ:VIAB) and Disney (NYSE:DIS). TBS and TNT remained strong and there were some improvement in CNN’s ratings driven by the coverage of U.S. presidential elections.
In addition to this, Time Warner is seeing HBO’s expansion in international markets, and it makes sense for the company to trim its business by divesting its publishing unit and become more focused on its networks where the growth lies. The competition is increasing and the emphasis on original programming will be one of the key differentiators ahead, and the company can divert its resources towards this effort with a sale.
Our price estimate for Time Warner stands at $62, implying a premium of about 15-20% to the market price.Notes:
- Time Warner’s SEC Filings [↩]