Time Warner to spin off its magazine division

Matt Krantz | USA TODAY | March 7, 2013

Time Warner is spinning off its magazines, including "Time," "Sports Illustrated" and "People."(Photo: Mario Tama, Getty Images)

Story Highlights

• Time Warner's decision to spin off the Time publishing unit is the latest in a spinoff craze
• The number of spinoffs is off to good clip in 2013 as companies look to push stocks prices up
• Spinoffs have been lucrative for investors in the short and long term

Companies are finding one of the best ways to unlock the value of

under-appreciated assets is to kiss them goodbye.

Spinoffs, financial moves where companies jettison a unit into a stand-alone business, are catching on as CEOs look for ways to keep their stock prices moving higher. With other strategies such as cost cutting played out, spinoffs are a quick and easy way for companies to gain appreciation with investors, says Joe Cornell of Spin-Off Advisors.

In a spinoff, a company ejects a business, its products, employees and management into a company with its own separately traded stock — and therefore its own shareholders to answer to. "Companies with assets with value not being reflected are asking, 'Wouldn't it be better to spin this off?' " Cornell says.

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Time Warner's decision Wednesday to spin off its magazine division, home to iconic names such as Time and Sports Illustrated, is the latest example, coming just months after News Corp. disclosed similar plans for its publishing unit.

So far in 2013, there have been nine spinoffs completed, putting it on pace to be the busiest year for such deals in awhile, says Spin-Off Advisors, easily topping the three spinoffs at this point last year.

A strong year for spinoffs would reverse a rocky stretch for the deals as companies instead focused on cost cutting as a way to improve returns. Last year's total of 37 spinoffs was down from 47 in 2011, though up from just 20 in each 2010 and 2009,

Spin-Off Advisors says.

The environment is ripe for spinoffs due to a variety of reasons, including:

• Investors' appreciation. Time Warner's success with two past spinoffs probably urged it to do more. Shares of AOL (AOL) are up 80% and shares of Time Warner Cable (TWC) have risen 261% since their spinoffs from Time Warner in 2009. The Bloomberg Spin-Off Index, which tracks the performance of all spun-off stocks, is up 47% the past 12 months, topping the 14% gain of Standard & Poor's 500 14% over the same period. "Spinoffs have been great investment opportunities," says Doug Sandler of RiverFront Investment Group.

• Strategic payoff. Academic research has shown spinoffs are good for shareholders of the parent company and the spinoff itself, especially when the business being spun off is a distraction, says Jim Rosenfeld, professor of finance at Emory University. Over the long term, the value of the parent company typically rises 3% on the announcement of a spinoff. Time Warner (TWX) shares rose 2.4% Thursday on its news.

• Strong stock market. Once companies undergo a downturn, pare costs and assess their structure, that's usually the time they start to consider spinoffs, Cornell says. The deals are easier to pull off when the market sentiment is bullish, as it is now, Rosenfeld says. And that's why he thinks more companies will soon jump on the spinoff craze. "Spinoffs follow periods of high market activity," he says. "There are definitely more to come."

Matt Krantz, USA TODAY

View article on usatoday.com: Companies turn to spin offs to unlock value

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Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog enteries are delayed.  Subscriber-base receives the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs, published since March 1997.

Miriam Gottfried | The Wall Street Journal | March 11, 2013

Will an independent Time Inc. be able to thrive? For investors, the answer may be all in good, er, time.

Time Warner shareholders cheered the company’s decision to spin off the struggling magazine business. But if past experience holds, investors shouldn’t be too quick to write off Time Inc.

Indeed, spinoffs outperformed the S&P 500 by 233% from 2003 through 2012, according to an analysis of the Bloomberg U.S. Spin-Off Index by Chicago-based Spin-Off Advisors. The index contains stocks that were spun off from the top U.S. companies within the past three years.

Spun-off companies tend to be more focused and have management that is more incentivized to perform well than when those companies were divisions of larger entities, according to Joe Cornell, founding principal of Spin-Off Advisors. Spinoffs are also better capitalized and have more freedom to reinvest in their businesses.

Conglomerates have fallen out of favor among investors who now prefer making bets on specific assets, Mr. Cornell says. For Time Inc., the shares may fall initially as Time Warner shareholders abandon them for faster-growing cable networks. But that could pose an opportunity for value investors to step in.

Ironically, another reason spinoffs trade at a premium is they are more likely to be acquisition targets.

Hopefully for acquirers they prove a better fit the second time around.

–Miriam Gottfried

View article on wsj.com: Spinoffs: A Timely Idea

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Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog enteries are delayed.  Subscriber-base receives the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs, published since March 1997.

Gene Marcial | Forbes Contributor | Investing | March 5, 2013

MeadWestvaco (MWV), a global packaging company, isn’t exactlya household name and so didn’t attract much attention among individual investors – until one activist and seasoned investor, Nelson Peltz, bought a bunch of shares on Feb. 15, 2013. The surprise purchase predictably fired up the stock, indicating there was more to MeadWestvaco than what Wall Street and investors had perceived.

Right after it became publicly known that Peltz, who heads Titan Fund Management, bought a 0.9% stake in MeadWestvaco, the stock jumped some 12%, to $35 a share, up sharply from $31 the day before. That has prompted many individual as well as large institutional investors to reappraise the stock, which is now way up from its 52-week low of $26.15.

The immediate market reaction “suggests the stock’s inherent upside valuation on a sum-of-the-parts valuation basis,” says Joseph Cornell, president of Spin-Off Research in Chicago. He believes that with an activist investor holding a big block of stock, MeadWestvaco may be forced to make strategic moves to enhance the value of its stock.

Should management opt to break up the company, or seek a merger partner to avert a possible takeover attempt by Peltz? It’s almost predictable that the company will hire an investment bank for advise on what strategy to pursue. One possible solution, according to Cornell, may be spinning off one of its units.

“With lackluster share price performance followed by a sudden boost in price on the news of stake acquisition, we now believe MeadWestvaco warrants a review as a potential spin-off candidate,” says Cornell. Accordingly, he says, “we are resuming coverage of the company and assigning it a buy rating.”

He values MeadWestvaco at $7.3 billion, or $42 a share, using sum-of-the-parts valuation analysis. With the significant potential upside in the stock’s valuation, MeadWestvaco might be an ideal candidate for a potential spin-off, says Cornell. 4193 millon.

MeadWestvaco has five operating units: Food & beverage packaging, which has yearly sales of $3.1 billion; home health and beauty packaging, with annual sales of $770 million; industrial packaging, a corrugated packaging business in Brazil and India, with yearly sales of $457 million; specialty chemicals, which produces innovative technologies for the automotive, adhesives, paving and oilfield markets with annual sales of $940 million; and commercial development and land management, which handles real estate development and forestry operations which manages more than 836,000 acres of forest and generates annual sales of $193 million.

Should the company decide to break itself up, MeadWestvaco “might warrant a higher valuation, especially in the packaging business and specialty chemicals which could be construed as prime targets by its peers focused on inorganic growth initiatives,” says Cornell. So the company might opt to spin off any one of its units to enhance shareholder value. International sales account for some 50% of revenues, with 25% of total sales in the emerging markets.

The packaging industry has been characterized by consolidations, notes Cornell. Over the past 10 years, 1,268 deals with a total valuation of $100 billion were completed, according to data from Bloomberg. And the data suggests that the average premium on acquisitions were around 16%. Cornell figures that the packaging and special chemicals businesses could be prime targets for MeadWestvaco’s peers.

MeadWestvaco’s current valuation is compelling, says Cornell. Although the stock trades at roughly 8 times fiscal 2013’s estimated earnings before interest, taxes, depreciation and amortization (EBITDA) – a slight premium to its peer group median multiple of 7.5 — its rivals consist of players in the container and packaging businesses. But MeadWestvaco’s operations include specialty chemicals, which is characterized by superior growth and margin expansion. And its forest land holdings, which are capable of providing higher returns should prices improve, require premium valuation models, says Cornell, because of their different risk/reward profiles.

The Spin-Off Research expects the company’s packaging unit to post EBITDA of around $722 million, driven by a moderate 2% growth in sales in the company’s food and beverage and home, health, and beauty markets. And it expects the company’s specialty chemicals business to post EBITDA of about $294 million. driven by a 15% growth in revenues, coupled with fairly stable operating margins. The community development and land management business, based on the company’s historical pricing per acre, is expected to post net proceeds, after tax, of around $1.1 billion. The company owns about 654,000 acres of forest land in the Southeastern region of the U.S., and about 135,000 acres in Brazil.

And the company’s history of dividend payments also provides an encouraging and positive side to the stock. Over the past 10 years, the company has consistently paid rising dividends, currently at a yearly $1 a share starting in 2010.

Some of the largest institutional investors own big stakes in MeadWestvaco, including BlackRock, which holds 11.6% of the stock, and Capital World Investors, which owns 10.1%. Obviously, they are watching what MeadWestvaco’s next move will be.

Expectations are the company will spin off some of its assets to unlock their hidden value.

Gene Marcial, Forbes Contributor

View the article at forbes.com: This Global Packaging Company Carries A Lot More Hidden Value In Its Box

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Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog enteries are delayed.  Subscriber-base receives the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs, published since March 1997.