Keith Kelly of the New York Post reports some inauspicious news for the soon-to-be-spun-off Time Inc.
Kelly reports Time Warner is considering saddling the publishing spinoff with $1.5 billion worth of debt and a $90 million annual debt payment.
This is worse:
At the Monday management meeting, Time Inc. CEO Joe Ripp surprised some in attendance by insisting “debt is good,” according to insiders.
Chief Financial Officer Jeff Bairstow elaborated at the meeting that the company was “trying to find the right balance between long-term and short-term debt.”
That’s just baloney.
Debt can be good. If you’re a growing company, debt is good if you can borrow at, say, 4 percent, and return 10 percent. In that way it can spur growth without getting out of hand. Your increased revenue more than pays for your higher debt service.
But if you’re a declining company like Time Inc., debt is mostly bad—particularly if it’s money already spent. If Time was borrowing money to invest in new businesses or even to shore up existing ones, it would be risky but potentially worthwhile.
Taking on lots of existing debt, though, just sucks money out of the company and makes it that much more difficult to survive, much less thrive. If its existing debt that was taken on by other businesses, as it is here (see below), it’s basically looting.
Time’s revenue is falling sharply—last year it dropped 7 percent—and its operating income is falling even faster, down 29 percent last year. The declines have slowed considerably this year, but they’re still bad. In the first three quarters, Time’s revenue was down 3 percent and its operating income dropped 12 percent.
In 2012 a standalone Time Inc. would have had a debt-service coverage ratio of 4.7, assuming that $90 million debt service. This year, it would be 4.1. If Time’s operating profit continues falling at 12 percent a year, its debt-service ratio would drop below 2.5 by 2017—dangerously low.
Back in late March, when Carol Loomis, the Hall of Fame financial editor at Fortune, was a keynote speaker at a Time Inc. alumni club gathering, she said that she felt “a debt level of $500 million to $1 billion was manageable.”
She said a debt level of $2 billion would be ” problematic.”
A $1.5 billion level seems to fall somewhere between “manageable” and “problematic.”
As Fortune and Time Inc. employee Dan Primack noted in a very good piece last month, Time Inc. itself has just $36 million of debt. Time Warner would be dumping a billion and a half dollars in debt from other parts of the company onto the part least able to handle it.
If Time Warner loads up Time Inc. with $1.5 billion in debt (or even a half-billion dollars) it will be using private-equity-style financial engineering to milk its publishing assets—the foundation of the entire company, by the way—on the way down. If it’s actually interested in the future health of its publishing business, it will give Time Inc. far less debt and let its cashflow-rich businesses handle a slightly higher debt load.
Don’t bet on the latter, particularly since Time Warner has pledged that the spun-off Time Inc. “will have substantial indebtedness.”
That’s a crying shame, particularly since a fair (yes, I said it) spinoff would be essentially debt-free. Time Warner’s plan will ensure a far weaker Time Inc. and likely, before too many years, a bankrupt one.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at firstname.lastname@example.org. Follow him on Twitter at @ryanchittum.
Tags: financial engineering, Jeff Bewkes, private equity, Time Inc., Time Warner