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Time Inc. spinoff

I’ve been thinking…Just weeks ago, Time Warner gave up trying to sell a portfolio of its magazines to Meredith Corp and decided instead to spinoff to its existing shareholders the entire Time Inc. operation.  The proposed spinoff follows the successful path of Time Warner’s 2009 spinoff of AOL.

What are spinoffs and how are they done?

Time Warner is a public company that owns TV networks, production operations in TV and film as well as Time Inc., its print media business.  The spinoff of Time Inc. will create two publicly traded companies owned by the very same shareholders…one company will be Time Warner (but without the operations of Time Inc.) and the other will be Time Inc. (although it’s not known if the new spinout will retain the iconic Time name).  Shareholders will get no money just pro rata shares in the new spinoff.  It seems simple, but there are a lot of moving parts behind the scenes.

Key to the future success of any spinoff is the fundamental soundness of the underlying strategy and the specific people, assets and liabilities allocated to the newly minted firm.  The goal is to create and endow a spinoff entity that can grow and prosper on its own without materially wounding the company that spawned it.  Spinoffs can’t be dumping grounds for bad assets or too much debt…and shortchanging spinoffs with too little cash or ill thought out strategies can be fatal from the get go.

It’s a tricky balance for a Board, but a spinoff is one instance where Boards can clearly see whether their resource allocation decisions create value for their shareholders.  Time Warner arguably got this balance right with its spinoff of AOL, because total shareholder value has increased after the AOL spinoff.  On the other hand, the 1999 spinoff of Delphi from General Motors never really got traction, and Delphi filed for bankruptcy in 2005.

Some tricky accounting issues invariably have to be addressed in each spinoff transaction.  Specifically, management must work with their auditors to reasonably derive from the actual historical accounting record a complete set of books for the spinout…an entity that, in fact, never really existed.  For Time Inc., the end result will be a set of “carve out financial statements,” which will include three years of balance sheets, income statements and cash flow statements and the accompanying footnotes, as if Time Inc. had always been a public company.  It’s new math: 1 minus 1 equals 2.