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Forging Ahead



By Bill Mickey
11/28/2006

Stephen Kent's evolution from publishing company CEO to private equity-backed platform builder was not without its fair share of drama. In six years as CEO of Providence Equity-backed enthusiast publisher F&W Publications, Kent grew the business from $60 million to about $250 million in revenues. ABRY Partners agreed to buy it for about $500 million in late 2005 and soon after filed a lawsuit against Providence alleging it presented misleading financials, and sought to rescind the deal.

The suit was settled last June with Providence reportedly making an investment in F&W alongside ABRY, and Kent has since moved on to join the growing legion of magazine executives seeking new ventures. As it turns out, Kent had been in discussions with a number of firms just prior to the F&W imbroglio and emerged as principal in Boston Ventures-sponsored New Track Media, based in Cincinnati. Kent's company, with a consumer-enthusiast market strategy, has about $50 million in backing. He's made two acquisitions so far: Sky Publishing in February for about $6 million, and Fons & Porter in October.

Kent spoke with Folio: about his record with F&W, the subsequent lawsuit, and his thoughts on how private equity is influencing magazine M&A and operations.

FOLIO: How long were you with F&W?

KENT: Just shy of six years. I came to the company as CEO in 1999 when it was acquired by Citigroup Venture Capital. So I was recruited by CVC to join them in that transaction. I signed up about a month before the closing, worked with CVC to get the deal closed and on the day of closing went in as CEO. And I ran it with CVC for about two-and-a-half years when we elected to sell the company in a proprietary deal to Providence Equity Partners and Bill Reilly.

We had not intended to exit at that time. Providence and Bill approached us. For various reasons it seemed to be a good thing to do and Providence asked me during the course of those negotiations if I would stay on as CEO, which I did. So I then ran the company for another three years under Providence's sponsorship and we sold it last August.

I knew before we sold the company that I did not want to run the business for another owner and that was a function of a number of considerations. One was I think the company had gotten to the size where it was no longer as fun for me as it had been during the first several years when we were growing it from $60 million to $200 million. We had gotten up to about $250 million and while every organization is different, that organization at that size just didn't seem as entrepreneurial to me as it had a few years earlier.

I was eager to go do this again with another firm that would allow me to look at smaller and medium-sized deals. I talked to a limited number of private-equity firms at the time we sold F&W. Jerry Hobbs was the one who convinced me to do it with Boston Ventures. We started talking about the arrangement in early fall and by the end of the fall we had an understanding of how we would structure this and what kind of financing we would put in place and then formally open the doors in January.

FOLIO: When the lawsuit broke how did that impact your relationship with Boston Ventures?

KENT: The Boston Venture guys were remarkably supportive during this process and really didn't waver in their commitment to me or their interest in doing what we had started discussing in the early fall. Fortunately, Jerry [Hobbs] knew enough about me as did others at Boston Ventures that there was a lot of confidence that I'm a person of integrity and someone they wanted to do business with. That, combined with the fact that even today we're doing business with banks that were banks at F&W, is an indication that the market was willing to look beyond that action and base judgment on first-hand experience with me over a long period of time.

I should also tell you that when that happened, at that point there were several private-equity firms who knew that I'd made a decision to go with BV. I got calls from other private-equity firms who said, 'If for any reason there's a hiccup at BV because of this, I hope you'll come talk to us.' I don't feel the lawsuit in any way interfered with my ability to develop the plan and execute the plan that I wanted to do.

FOLIO: Did you circle the wagons with BV at all to talk about what was happening?

KENT: No. Let me be clear about this. Fortunately these firms are filled with very smart guys who are sophisticated and know their way around. By all means that was the case with the firms I was talking to. And that naturally also then means that they know when there's litigation involved there's a limit to what you can discuss. And so no one put me in the awkward position of having to discuss something that I shouldn't have been discussing based on the fact that this was in litigation. I think what helped me is that I didn't just wake up on a Tuesday morning and decide to go out and buy magazines. I've been doing it for long enough that people knew me, knew what I was capable of and had seen the results at F&W and were comfortable backing that in spite of the noise that this litigation created. I certainly wish it hadn't happened. I'm sorry it did. But it didn't change my plans whatsoever.

FOLIO: What did you learn from that experience?

KENT: Plenty. But that's for another conversation. I'd be a foolish guy if there weren't things to learn, even if it's just taking care of your team. Among the regrets I have is that there's been such an exodus of talented people from F&W. I'm sorry about that because I think the team we had was a terrific team with some talented folks who delivered very good results over a long period of time.

And I would bear in mind as you think about that situation that we delivered strong results over a nearly six-year period. It's kind of hard to do that if you're up to bad stuff.

FOLIO: What are the tangible, day-to-day ways that PE changes publishing operations?

KENT: The best firms bring access to capital markets, provide the ability to take reasonable risks funding growth initiatives, offer value added relationships with industry leaders, and probably add discipline to decision making.

It's absolutely the case, particularly in small to medium sized deals, that private equity ownership opens up relationships to a company that it wouldn't have otherwise. Some of this may be block-and-tackle stuff like bank relationships, but some of it is more subtle and has to do with board talent and resources available for vetting important issues affecting the business. Using our relatively new business as an example, would Sky & Telescope have access to someone like Jerry Hobbs if the magazine weren't owned by us? I don't think so.

It's probably fair to say also that private-equity ownership is going to bring a higher level of discipline to the planning process in most situations. This may be less apparent in larger deals, where planning, budgeting and reporting are already at a fairly high standard. But in smaller deals where ownership has been running the business hands on over a long period of time, there's no question that these activities have a tendency to be more lax.

I also see a natural change in the way risk is evaluated, certainly so when comparing private-equity ownership of a magazine to ownership by an individual or family. Private equity is generally going to be looking for growth and will have built that into plans for the business. This means that reasonable risks are taken and growth initiatives get funded. The more aggressive approach toward pursuing add-on acquisitions would be an easy example here.

FOLIO: What are the objectives of a PE firm going into an acquisition, and how have they changed?

KENT: At its most fundamental level, and maybe the only one where it's fair to generalize, the private-equity owner is going into an acquisition with the objective of exiting later with favorable economic returns. It used to be that those returns were one dimensional, more internal rate of return-based. This is no longer a game just of rates of return, it's also a game of tonnage because these guys have so much capital and these funds have gotten so large that in addition to generating a favorable rate of return they're also interested in generating in the absolute sense very large amounts of capital. KKR has invested capital of $25 billion, which is about $5 billion more than the annual budget of Peru. These firms are putting big numbers to work, which means they want IRR, but they also need large returns in absolute dollars to move the needle for their funds.

On other levels, it's trickier to generalize regarding objectives. This is particularly true in this environment, where pricing on deals has become so high. In the most robust auctions, bidders have to have an angle on the deal in order to make the numbers work at a very full multiple. It can be bulking up another portfolio investment, which is how people chose to interpret the acquisition of Weider by AMI, or it can be as simple as just wanting to enter the game, as some people see the deal by Sandler to acquire Primedia's crafts business.

It would be a mistake to believe that one bidder just stumbled on something that others overlooked. These folks are all smart and they all spend king's ransoms during due diligence, so it's foolish to believe one discovered something the others hadn't seen. Instead, one bidder's willingness to pay an extra turn or two will trace to having an angle on the deal that supports the higher pricing.

FOLIO: Does the short-term, return focus cause operators to behave differently?

KENT: This is a tough one because I'm convinced that private-equity folks do focus on the long-term. They want to do right for the business, invest in areas that will strengthen long-term value and want to know that they're building something with a future growth story. Most people are going to have a five-year outlook, they're not just focused on today. It's no different from a public company really.

Digital content and Web-based product would be an easy example of where this becomes complicated. Because this is an area where the profit model has been elusive for many of us, it's an area that has been under-resourced and it's become a game of catch-up. Most private-equity people want to see a Web strategy, but some will quiver if it's costing cash and the payback extends beyond any reasonable exit. However, nobody will be so foolish as to cut it recklessly. It just needs to be baked into plans and other, less strategic spending needs to be reexamined to cover for it.

I really think this is just a part of understanding there's an earnings target and hitting the target isn't optional. The CEO has to balance resources inside the realities of a private-equity owned business, which is one that does place a high value on generating consistent growth.

FOLIO: What is the typical investment pattern after acquisition? Is it focused on new acquisitions? Beefing up organic growth? Hiring?

KENT: It seems there's typically a period post-closing when the private equity firm is really getting to know management. You've married but never lived together, so there's a sorting out period in most deals.

In most transactions a plan's been developed during the course of diligence and negotiations, so there are normally some initiatives that new ownership and management will have agreed to pursue.

If there are holes in the team, that's going to have a high priority because it's so important to executing everything else effectively. If the team is complete, it's typical to see some fresh approaches taken to circulation testing, SIP programs, and development of ancillary revenue opportunities like shows.

I'd say it's less common to see an aggressive acquisition program coming out of the box. Some of this is understandable in that people want to digest what they've just bought and work together for a while. But it's foolish to pass on important strategic opportunities just because you haven't spent much time together. If your key competitor is for sale all of a sudden, it probably makes sense to look at the opportunity even if you happen to have just closed on your own deal.

By Bill Mickey
11/28/2006







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