October 5, 2020

Meredith was for years the under-the-radar magazine company from Des Moines that financially outperformed its flashier New-York based cousins like Condé Nast.

That relatively low profile changed three years ago when Meredith acquired Time Inc. and its cluster of famous legacy titles. Within days, Meredith had changed out the signs to put its name on Time’s Manhattan skyscraper.

A lot has gone wrong since:

  • Meredith shares have lost more than 60% of their value since the start of 2020 and are down from $66.05 to about $13 since the Time deal was announced in late 2017.
  • Stock market disappointment reflects stalled revenues, higher than anticipated costs absorbing Time together with interest and repayment on the high-rate borrowing Meredith took on to do the deal.
  • The COVID-19 ad recession seems to have hit especially hard at Meredith’s lifestyle and celebrity titles, led by People and Better Homes and Gardens and mostly targeted to a female audience.
  • Meredith has recognized a $296 million (non-cash) writedown loss on the value of assets as carried on its books. Plus another $88 million “special item” loss associated with integrating Time into its operations.
  • Within the last month the company laid off 180 staffers (after an earlier round of pay cuts). Now it has set the stage to potentially split off its smaller but very profitable local broadcast division from the magazine group.

Should Meredith go that route it might generate a new pool of working capital for digital growth at its magazines or new ventures. On the other hand, a split will leave the company without the balance of steady earnings from TV.

The unexpected reversals, to my eye, resemble the all-too-familiar saga of the deteriorating newspaper business. Among the parallels: plunging print revenue for legacy brands that must keep publishing to retain longtime customers, deflating assets, and a loss of faith among investors in the future.

I retain optimism that strong Meredith management can rally from the current damage to its business, but circumstances will work against a quick turnaround.

Women’s Wear Daily first reported Meredith’s layoffs in mid-September. Otherwise Meredith laid out the current trouble and a bearish forecast a month earlier in its last quarterly earnings report and conference call with analysts.

“We are experiencing an environment unlike anything we’ve ever seen,” CEO Tom Harty told the analysts. “While we do not know when the advertising environment will return to normal or what the new normal will bring, we have adapted swiftly, focusing on what we can control and emphasizing our strengths.”

Overall measures of consumer engagement with print and digital content are fine, Harty continued, but advertising still amounts to about 50% of revenue.

Rewinding to the Time acquisition three years ago, hopes for the merged company were high. Meredith did pay more than a 40% premium over the trading value of Time stock. It borrowed about a quarter of the $2.8 billion deal’s price tag from a financial subsidiary of Koch Industries (which gained no say on editorial matters).

The company’s long record of profitability and early successes in digital deals with its biggest ad clients like Kraft boded well in my view and that of other analysts.

The cost of acquiring a bigger company was cushioned by Meredith’s decision to sell Time’s news titles — Time itself (for $190 million to Salesforce billionaire Marc Benioff and his wife), Fortune (to a Thai businessman for $150 million) and the Sports Illustrated brand (for $110 million to Authentic Brands, a licensing company).

Meredith did not have experience with hard news publishing so those spinoffs made sense. The prize for Meredith in the deal was People, the nation’s most financially successful magazine. Southern Living was a tidy fit, too.

Typical of such consolidations, Meredith realized savings of $400 million a year or more by combining functions. Lower labor costs in Des Moines compared to New York helped, too.

The first red flag for investors came in September 2019 when the company reported that earnings for the last year had been less than expected, that the Time acquisition had hit unanticipated difficulties and that its forecast for 2020 was for flat revenues.

Shares fell 23% in a single day.

That, of course, preceded the COVID-19 crisis and its economic impact. So actual results have fallen well under the disappointing forecast.

The layoffs caught my attention. They are less than 4% of a workforce of more than 5,000, but the split was 50 staffers in the magazine group and 130 in local broadcast. This comes in a year that is pretty much a bonanza for local broadcasting as stations rake in political advertising.

Harty explained in the recent call with analysts that Meredith is not reaping much of the windfall of the presidential race. Several of the unit’s biggest markets (Portland, Oregon; Nashville and Atlanta) are in noncompetitive states.

Presidential spending accounts for only about 10 to 15% of Meredith’s political advertising. Races for governor and the U.S. Senate are more important; as it happens, there are fewer of them in Meredith markets this year than in 2018.

There are no current plans to split the company, it said Sept. 9, but wants to approve a change at its annual meeting in November to at least make that possible.

I have seen that breakup happen many times over in the newspaper industry — among companies including Gannett, Tribune, The Washington Post, A.H. Belo and E.W. Scripps. A slow-growing or declining print/digital franchise, the theory goes, drags down the value of the sister broadcasting arm.

At the same time, the remaining legacy business may attract less and less capital from stock market investors. That, in turn, potentially gives the hedge fund crowd an entree.

Meredith has plenty up its sleeve to avoid that result. It continues in 2020 to “adjust its portfolio,” as the industry saying goes — closing the venerable Family Circle, making Entertainment Weekly a monthly, and converting two other titles to newsstand specials rather than subscription products.

It has moved on from the first generation of digital deals to more current offerings, and evergreen content like recipes that thrives on the internet.

The company continues to operate at a comfortable profit on a cash flow basis and carry a reasonable debt load in proportion to its annual revenue and earnings.

It’s not a good look for the magazine industry, though, when its brightest star is headed, even just for now, in the wrong direction.

Rick Edmonds is Poynter’s media business analyst. He can be reached at redmonds@poynter.org.

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
Rick Edmonds

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