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Why Greenlight Capital opens new position in Time

Smita Nair

Overview: Greenlight Capital's 2Q positions (Part 4 of 7)

(Continued from Part 3)

Greenlight Capital and Time

David Einhorn’s Greenlight Capital initiated new positions in Civeo Corp. (CVEO), AerCap Holdings NV (AER), Time Inc. (TIME), and Chemtura Corp. (or CHMT). It and added to its positions in SunEdison Inc. (SUNE) and Lam Research (LRCX).

Greenlight disclosed a new position in Time Inc. (TIME). It accounts for 1.13% of the fund’s 2Q14 portfolio.

Time Inc. is a spinoff of Time Warner’s (TWX) publishing business. The spinoff was completed through a pro rata dividend on June 6, 2014, of Time’s shares held by Time Warner to Time Warner shareholders. It was based on a distribution ratio of one share of Time for every eight shares of Time Warner.

Time is the largest magazine publisher in the United States based on both readership and print advertising revenues. It’s the largest magazine publisher in the UK based on print newsstand revenues.

As of June 30, 2014, Time published 23 magazines in print in the United States, including People, Sports Illustrated, InStyle, Time, Real Simple, Southern Living, Entertainment Weekly, Travel & Leisure, and Fortune.

It published over 70 magazines outside the United States, primarily through IPC Magazine Group Limited in the UK and Grupo Editorial Expansion (or GEX) in Mexico.

It also operates over 45 websites. Time has an integrated publishing business that provides content marketing, targeted local print and digital advertising programs, and branded book publishing and marketing and support services.

The company generates revenues mainly from the sale of magazine advertisements. It also generates revenue on websites, magazine subscriptions, and newsstand sales.

In its quarterly filing, Time said that it’s “developing new strategies and initiatives intended to enhance the scale of its digital platforms and associated revenues, extend brands and audiences into new adjacent opportunities, enhance the alignment of its creative functions with its business requirements, and stabilize operating income trends.”

Sells Mexican publishing business Grupo Editorial Expansion

In June, Time said it sold its Mexican publishing business GEX to Southern Cross Group—a Latin-American private equity firm. GEX was founded in 1966. It was acquired by Time in 2005. GEX is Mexico’s second largest magazine publisher with 16 titles including Expansión, Quién, and Life & Style. It has ten websites such as Mediotiempo and Metros Cúbicos. GEX’s monthly reach is nearly 30 million.

During 2013, GEX revenues represented less than 2% of Time’s combined revenues. Time said it’s focused on “growing core assets in the U.S. and UK” In June, Time acquired Cozi Inc.—a Seattle-based technology company with a leading portfolio of mobile and digital family organizing tools.

Results impacted by wholesaler transition and restructuring charges

Revenues for the second quarter decreased 2% year-over-year (or YoY) to $820 million. The revenues missed estimates. Total advertising revenues increased 3% to $461 million. Print advertising was up 1% to $387 million. Digital advertising revenues increased 12% to $74 million.

The company saw a decline in circulation, subscription, and newsstand revenues. Other revenues that declined included marketing and support services provided to third parties, branded book publishing, events, and licensing.

Time said “We took actions to strengthen our retail distribution network when our second largest newsstand wholesaler defaulted on its payment to us. The estimated impact of the wholesaler transition reduced revenues by $19 million and adjusted OIBDA by $27 million.” The wholesaler was identified by news reports as Source Interlink Distribution, whose parent company filed for Chapter 11 bankruptcy protection in June.

Time reported a net loss of $32 million compared to net income of $75 million in the same quarter last year. This was due to the inclusion of restructuring and severance charges of $55 million and goodwill impairment of $26 million. The charges were related to the sale of GEX.

In 2014, Time initiated a restructuring plan that included streamlining its organizational structure to “enhance operational flexibility, speed decision making, and spur the development of new cross-brand products and services.”

Rising competition and shifting consumer preferences

Time said it’s experiencing declines in its print advertising and circulation revenues as a result of market conditions in the magazine publishing industry. Since magazines are generally discretionary purchases for consumers, the circulation revenues are influenced by the general economic conditions, economic cycles, and evolving consumer preferences.

Time noted that there has been a shift in consumer preference from print media to digital media. There was also growing consumer engagement with digital media, such as online and mobile social networking. This has introduced significant new competition. Also, the use of digital devices to distribute content has lowered the barriers to entry for launching digital products. These digital products compete with the company’s businesses.

The company updated its 2014 outlook to reflect the impact of the wholesaler transition, the early relocation of corporate headquarters, and the sale of GEX. Full year revenues are forecasted to be between $3.30 billion and $3.37 billion. The adjusted operating income before depreciation and amortization (or OIBDA) is forecasted to be between $510 million and $547 million.

The wholesaler transition, initially announced on May 27, 2014, is expected to adversely impact full year revenues by $22 million. Time also said in its earnings release that the transition is expected to impact full year adjusted OIBDA by $30 million.

Continue to Part 5

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