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Meredith's acquisition of Time likely to spur asset sales: news analysis

While Meredith Corp.'s $2.8 billion cash deal to purchase Time Inc. is aimed at buttressing its position relative to circulation, advertising and the digital universe, analysts expect the combined company to divest some well-known magazines that don't align as closely with the rest of its women's and lifestyle portfolios.

The deal, expected to close in the first quarter of 2018, would result in a combined entity with readership of 135 million and paid circulation of nearly 60 million. Meredith's 17 TV stations aside, the resultant company would feature a digital media business reaching 170 million monthly unique visitors in the U.S. and generating 10 billion annual viewers.

This marks at least the third attempt by Meredith to acquire Time since 2013. Meredith was one of a handful of bidders that made competing offers earlier this year for Time, which has struggled to transition as the internet age transformed the magazine industry.

"This is great deal for Meredith, giving it significant scale," said Benchmark Co. analyst Daniel Kurnos in an interview. "Meredith provides better execution for the magazine business today; Time is the better reach vehicle." He said that eventually selling off some of the Time titles is likely part of Meredith's strategy.

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After the transaction closes, Meredith would become one of the top two magazine publishers globally, along with Hearst Magazines, said Samir Husni, the director of the Magazine Innovation Center at the University of Mississippi, School of Journalism, in an interview. He, too, expects some titles to be sold a year or two down the road.

"Meredith's management will establish better practices, stabilize the brands, initiate new business models, invest in content," Husni said. With the "Meredith touch," he believes the combined company will be in a position to sell several leading titles for "more than total value" of the current transaction. He suggested the Time, Sports Illustrated and People brands should draw interest.

Kurnos isn't so sure the divestitures will be that widespread. "Perhaps you are looking at one or two of the large brands."

Minesh Patel, an analyst at S&P Global Ratings, said Meredith may steer away from the news space, which is very crowded with digital and TV competition. Rather, he believes the company will look to keep titles tied to lifestyle, entertainment and women.

Husni agreed, noting that In Style, Real Simple and Health will be key additions to Meredith's women's-targeted portfolio, led by Better Homes & Garden, Family Circle, Parents and Shape.

On the Nov. 27 conference call announcing the deal, Meredith President and COO Thomas Harty said the company will allow Time to continue pursuing deals for assets that are currently for sale — Time Inc. UK, Golf, Sunset and Essence — before the transaction's close. Meredith has put the move to sell Time's fulfillment operation on hold.

Chairman and CEO Stephen Lacy told analysts that Meredith is going to take a "holistic look" at the combined portfolio, assessing ad category components. He also said the importance of the different brands comprising the company's top 10 digital play also "has to be factored," before adding that Meredith will "make some very informed decisions and move forward, but none of those decisions have been made as we speak here today."

Meredith's National Media Group, its magazines unit, produced revenues of $1.08 billion and EBITDA of $164.1 million in its fiscal 2017, ended June 30, while its Local Media Group, its TV stations, generated a record $630.2 million in revenues and $249.7 million of EBITDA.

The transaction for Time — including a $650 million preferred equity commitment from Koch Equity Development LLC, which the companies said won't have a seat on the Meredith board and no influence on editorial or management operations — would create an entity that would have generated adjusted EBITDA of $800 million on combined revenues of $4.8 billion in calendar 2016. Some $2.7 billion of the revenue mix is tied to advertising, including $700 million from digital properties.

Additionally, Meredith anticipates the combined company will realize $400 million to $500 million in synergies in the first full two years of operation.

"It's a positive [deal] for Time, but when you get down to the nuts and bolts of the integration, you have to see how it all plays out in an environment of declining print revenues and digital revenues being challenged by continual development of new content platform alternatives," said S&P Global Ratings' Patel.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.