Typically, spinoffs are great opportunities for investors to snag up underfollowed, and sometimes undervalued, companies while the rest of the market turns a blind eye. For two upcoming publishing spinoffs, though, it's going to be a hard sell even for special-situations lovers. The publishing business is in upheaval, and these two companies are a large part of what is being upheaved -- and it's probably why their parents are using this bull market as an excuse to unload these revenue drains.
Of course, since analysts and investors have been quick to squawk about these seemingly terrible investments, I'm compelled to take another look. There are few elements to stocks more attractive than being universally disliked by the Street and its minions. Let's see if these two upcoming publishing spinoffs are as bad as they say.
Introducing the losers
Companies spin off their components in efforts to unlock hidden value in the parent, the subsidiary, or sometimes both. When a thriving business is burdened under a slower-moving conglomerate, sometimes the only way is for it to take on a life of its own as another public entity. In this case, though, it's really the parents that are thriving and need to be allowed to fly free.
News Corp. (NASDAQ:FOX) is a parental case in point. It's a diversified media company with properties ranging from Fox News to The Wall Street Journal. It's been a strong company that's weathered disruptive technology and industry change well, phone hacking aside. The stock has responded accordingly, rising more than 50% in the past 12 months. The company is currently a top favorite among hedge fund managers, as its upcoming schism will yield one company that operates the difficult publishing business, and one that operates the media and entertainment operations -- including the highly valuable regional sports networks.
The other company to announce excommunication of its publishing side is Time Warner (NYSE:TWX.DL). This is third major spinoff for Time Warner, which already separated its cable company, Time Warner Cable (UNKNOWN:TWC.DL), and its Internet property, AOL (UNKNOWN:AOL.DL). Though volatile at times, Time Warner Cable performed well in 2012, rising a bit more than 50% throughout the year, only to retract a bit in the early months of 2013. After a decade-long rough patch following the tech bust of the early 2000s, AOL seemed to have finally turned the corner midway through 2011 and has since been on a nearly vertical trend.
For both companies, though, these latest spinoffs haven't been met with enthusiasm. Just this week, Yahoo!'s Jeff Macke ripped into both prospective companies, citing Time Inc.'s troubled titles such as People magazine. The magazine industry, with the exception of those that have taken to the Web successfully, is getting crushed. A weekly newsrag, regardless of its content, cannot compete with the instant gratification of the Huffington Post or Gawker.
News Corp.'s spinoff may be more attractive than Time Warner's, as the aforementioned Wall Street Journal remains the end-all publication for all things business. Even this tech-friendly blogger insists on reading it every morning, front to back. It is a ray of light in the midst of dying stars, such as The New York Post -- another News Corp property.
In all, News Corp. publishing still posted a net loss of $2.1 billion in its last fiscal year. This was partially due to the phone-hacking scandal and restructuring costs, but sales were down 5% year over year.
Time owns 21 U.S. magazines, from Time to Sports Illustrated to Fortune. Sure, these are the top names in the magazine business, but that's like owning the fastest sloth these days. According to Time Warner's recent 10-K, Time is the largest magazine publisher in the world by advertiser volume. Is that valuable on its own? Possibly, but it hinges on having each of its publications perfectly transition away from print, because print magazines were dead yesterday.
You aren't buying a turnaround play if you invest in either spinoff. These are companies that face an uphill battle, and the odds are against them.
The sole factor in deciding whether either of these spinoffs is worth your time is their price. News Corp. and Time Warner probably know that these stocks will receive soft demand and that, when they distribute shares of the newly formed companies to existing shareholders, investors will probably dump the shares immediately and take the profit. This does leave opportunity for bargain-hunting, cigar-butt-puffing stock pickers. It's all about price, though. When we see the initial offering price, then we can determine whether there's a play here. After all, I'd love to pay $0.50 for a $2.00 Wall Street Journal.