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Private Equity Player



Bill Mickey By
07/28/2006

Skip Zimbalist, formerly CFO at Times Mirror Corporation and CEO of its Times Mirror Magazines subsidiary, formed Active Interest Media in 2002 with $150 million of leverage and equity backing from Wind Point Partners. His role as CEO of a platform publishing company with private-equity backing has become an increasingly common one, with firms seeking out "seasoned executives" who can initiate and manage leveraged build-ups.

So far, Zimbalist has made four acquisitions over the last six years: Sabot Publishing, Home Buyer Publications, American Cowboy, and Yachting Promotions, representing a range of enthusiast categories. More are in the pipeline and Zimbalist notes that Wind Point has agreed to provide more equity if and when he spends all of what's currently been provided.

Zimbalist spoke with FOLIO: about how the executive/private equity relationship works and how these firms are impacting the magazine industry.

FOLIO: How long do you have to get some acquisitions under your belt?

ZIMBALIST: The pressure depends on where you start. You want to start with a fairly sizeable acquisition that can support the additional overhead that you bring to bear. We started with a fairly small acquisition;six magazines;so there was an urgency to get it bigger. We made our first significant acquisition about four or five months after that, which bulked us up quite a bit. And then we spent some time rationalizing that and then went on from there.

FOLIO: How involved does Wind Point get in your acquisition choices?

ZIMBALIST: I'm sure if there was any particular acquisition opportunity that I loved and they hated or that they loved and I hated I'm sure we would back off of that. You usually handle those kinds of situations right up front when you're talking about what your strategy is. So I haven't run into that. It's important that your values and what you're looking to do are compatible with what your private-equity firm's are. Some firms are looking for a quick turnaround. They want to go in and buy something and do some financial engineering and then sell it. Others are building for the long term. It's important that you be on the same page about that.

FOLIO: How do private-equity companies like to see their portfolio companies operated? How is this different from companies that aren't backed with private equity?

ZIMBALIST: I think what's true across the board of private-equity firms is that there's a definite exit strategy from the beginning. When you buy something, you buy it with the realization that you're going to sell it, which is different from working in a publicly held or privately-owned company. There are some differences in how you purchase and operate a private-equity backed media company than you do one that isn't. For example, I ran a magazine company that was publicly traded.

The purchase price was less important since typically you're buying a company with stock and the purchase is a relatively small percentage of the total capitalization so it doesn't really move earnings per share. But what is important is quarterly earnings in that case. There are commitments made or estimates made and therefore you're acutely aware by quarter what your earnings are. So growth and earnings per share on a quarterly basis is the most important metric in a publicly traded company.

In the privately-owned companies that I've seen, those are run according to the values of the owner but typically one important metric is cashflow to owner. And they take a draw every month or every year and that is pretty sacred. You don't want to cut that draw. They are less concerned with quarterly growth or annual growth but they're more about the quality of the magazine, the contribution that it's making and their own draw. And then they're trying to build a track record for the last two or three years before they get ready to sell. When you're working with a private-equity firm you're not concerned with quarterly earnings except for the fact that you typically have bank debt and those bank loans have covenants which have quarterly tests. So you want to make sure that you're not in violation of those bank loans.

And that's an issue that is a very important discussion between the management team and the private-equity firm. The more bank debt that you put on a magazine company the higher returns to the equity are, but it also means the more risk there is if there's a downturn. So you find yourself managing the company to the loan covenants and saying, ムWell, can I do my direct mail this quarter or not?' I know one of my own concerns is that you don't over-leverage a company so that you can run it the way it should be run, and run it based on long-term value, not on satisfying your banks all the time.

FOLIO: How does that affect the day-to-day production of the product?

ZIMBALIST: It's important to have the right kind of loans and not too much leverage, and then it doesn't affect it. If you do have too much leverage and there are some companies out there that have been too highly leveraged, companies like American Media and Primedia at one point;they've deleveraged recently;it really restricted their ability to run the business because they were under the gun to pay back the banks and make their interest and principal payments.

The second thing that can be different is how you do startups or take on losses. And that has to do with the fact that you have loans that have profit tests every quarter. And so if you want to start a magazine and it's going to lose $5 million a year for five years, that's going to reduce your profit and reduce your ability to borrow by a multiple of profit. You have to set up a special arrangement with the bank, where you carve out all of this startup stuff and put it in a separate company that's separately funded by the private equity firm and run two sets of books. Or you have to manage very carefully any loss-making businesses that you start up or invest in so that you're not creating a problem with your loan covenants.

FOLIO: Do these issues tend to discourage startup ideas or organic types of growth?

ZIMBALIST: There is definitely a bias to buy existing profitable magazines. There's a financial incentive to do that as opposed to taking a risk and investing a lot of risk capital in a startup. And that's true for a few reasons. One is the one I just mentioned and another is the limited timeframe that you have. There is less time for a business to mature and come to fruition and so the kinds of things that you want to start up are the ones that have a pretty fast track to profitability.

FOLIO: Describe some of the common exit strategies.

ZIMBALIST: The one that is the most popular is to sell to another private-equity firm. Let's say you take a business from zero to $150 million in revenues and then you sell it to someone else who takes it from $150 million to $300 million. In that case there's the least disruption in the company because they keep the platform and all of the functions, and management;if it wants to;stays intact.

The second way is to sell to a strategic buyer who is already in this business. It's often true that they can afford to pay more than another private-equity buyer and the reason is that they don't need the back office. So they have a lot of savings that they can get by consolidating those back-office functions.

A third way is a combination of those two where you have a private-equity backed company that wants to get even bigger.

FOLIO: As an executive who's come from a publicly-traded company to a private-equity backed company, how do you think your management style has changed?

ZIMBALIST: In the private-equity world you're more acquisition oriented, so I probably spend more time thinking about acquisitions than I did as a strategic manager in a publicly-traded company. Therefore, I think you spend more time on the financial side of management and you have less time to spend on operations.

There is a lot of collaboration with Wind Point and they are very valuable in that because you are dealing with acquisitions, and therefore you're dealing with banks and investment bankers and lawyers and accountants, so there's a lot of collaboration on that. So you're spending time thinking about contracts and non-competes and non-solicitations. And then bank financing is something that you would spend more time on than you would in another environment too.

FOLIO: Do you think private equity has created among the smaller strategic players a sense of a higher payout?

ZIMBALIST: I don't think that private equity necessarily pays a higher multiple;the strategic buyer can wipe out the back office. But there are a lot fewer [strategic buyers] and at any one point they may not be in the market. I think what private equity has done is create a wealth of buyers out there with a lot of money to spend. That has its own way of driving up prices. And they are typically disciplined, because at the end of the day they have to sell it for more than they bought it for. You can overpay for one or two things to get started but you have to average that down over time or you're not going to make good returns at the end. I think it's more the number of buyers out there that have been created, as opposed to the fact that they're private-equity buyers.

FOLIO: What are some other ways private equity has impacted magazine publishing as a whole?

ZIMBALIST: The whole idea of a private-equity firm is buying something and making it much better over a period of time than it was when they bought it. They also are very concerned with building value within the things they buy and trying new strategies and investing in new markets and new technologies. It brings a lot of dynamism and creative minds and a pressure to make things better. Not to say that this doesn't happen in publicly traded and privately-owned companies, it does.

But I think it happens to a bigger extent because there's a timeframe involved. And there's an end date and therefore we have to get on it now if this thing is going to come to fruition down the road a few years. If there are negative impacts I think it is when you get into over-leveraged situations; when you get too greedy and put too much debt on a company. What happens is you starve the underlying properties in order to meet the bank's service requirements. And you're cutting into muscle and that's a downward spiral that these companies get into because they're overleveraged.

FOLIO: What's private equity's attraction to the magazine business?

ZIMBALIST: From our perspective in the industry it seems as though it's huge and they're everywhere, but it is a fairly tiny percentage of the total assets that private equity is investing in. But having said that, the characteristics that are good about it is that first, the cashflows are fairly predictable and stable. Private equity and leverage can't stand huge variations in cashflows.

The second thing is the magazine industry is not capital intensive. You basically need to replace your PCs every three years. Most of your assets walk out the door every day. The third thing is there is a lot of recognized power in the brand. If you have a strong brand you have a strong market position. That has power and it gets you through recessions and it helps you launch into other media. And I think it's something where good management can make a big difference in a finite period of time.

Bill Mickey By
07/28/2006







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