No longer strictly in the realm of bulge-bracket, $1 billion-plus deals, the fallout from the sub-prime credit fiasco is trickling down to mid-market deals. And the magazine media market is feeling the pinch, too. Certainly, deals that were done in the nick of time—ALM, Primedia Enthusiast, Advanstar, to name a few—would have looked dramatically different had they closed only a few months later than they did. And even smaller deals at $250 million to $500 million levels are looking at lending and transaction multiples one or two clicks lower than they were in the first half of this year. While the market is certainly not as bleak as it was in 2001 or 2002—deals are still getting done—but there has definitely been a correction in the sense that we’re now on the downside of the peak. And that might be a good thing.

Overall, the sense is that financing deals, especially in leveraged buyouts, are getting much more conservative. No longer an afterthought, sellers are now especially looking for proof of committed financing. “We went through a period where financing became less important because credit was easily available,” says Seth Rosenfield, director at BMO Capital Markets, the investment banking division of the Bank of Montreal. “Now financing has returned to being a fundamental part of the equation. You need to bring lenders to the table earlier, and conversely, sellers are now focusing on certainty of closing as a higher priority because they don’t want their deals delayed or re-priced due to financing.”

Close Calls
Indeed, as early as May of this year, deals were sometimes getting done via generous or esoteric hybrid loan constructions such as covenant light, pick toggles, second lien, or collateralized debt obligations. “That market is dead now,” says Thomas Kemp, managing director at Veronis Suhler Stevenson, who says that any large credits that needed to be syndicated are effectively on hold. “Transactions that got done earlier in the year like the Wasserstein purchase of Penton [for $530 million] and even our purchase of Advanstar at over $1 billion—those would not have gotten done on the same terms, if at all, if we did those deals then,” says Kemp. “We closed Advanstar at the end of May and things started changing certainly in July, if not in June.”

The Advanstar deal, says Kemp, was a covenant light deal, which means there are no substantive covenants with the banks. That feature would not have occcured if the deal closed in August. “This is not to say the deal would not have gotten done,” says Kemp. “But the terms would not have been nearly as favorable as they were.”

A Turn to the Traditional
So deals are still getting done. Questions remain, however, about pressures that have trickled down from the big market deals to the mid-market deals—questions on volume, value and lending multiples, to be precise. Exact volume in the publishing market may be harder to predict as some buyers will be benched as they wait for better terms. “Firms still have capital that they need to put to work,” says Peggy Koenig, managing partner at private equity firm ABRY Partners. “But if their target rates of return are dependent on getting eight-times or seven-times leverage levels and they can only get five, they may not be willing to buy things and may have to sit on the sidelines.”

In the overall LBO market, however, volume has dipped, adds Koenig. “In the first half of 2007, forgetting about the media market, there was $436 billion of LBO volume and in the months of July and August it was $54 billion. If you keep up that volume, that’s $150 billion compared to $436 billion in the first half. So what started out to be a record year of LBOs is fast turning not into a record year.”

What’s more, transaction and lending multiples in mid-market deals are taking a hit, says Kemp. “When leveraged multiples come down for larger transactions, when there are more covenants being added on, that has a spillover effect through the course of the market. What we’re seeing now is more traditional. Where deals were getting done at seven-times leverage, now you’re going to see leverage more in the five- or six-times range.”

Terms like that will lock some buyers out of deals and force others to adjust their leverage threshold. Reed Phillips, managing partner at M&A brokerage DeSilva + Phillips, notes one deal his firm worked on this summer. “We got the deal done, but they could not get the credit they needed,” he says. “They had to do the deal with equity. The buyer was a very buttoned-up buyer with a lot of acquisition experience and should have been a shoe-in for additional credit. Instead, the banks came back with very high prices for additional credit that made it impossible to go that route. This never would have happened three months ago.”

Deals in the pipeline, however, are looking at the possibility of a substantial renegotiation, especially those unlucky enough to have products in a market impacted by the sub-prime fallout—mortgage, construction, real estate, and others. “There’s a recent media-related deal in which an important part of the business was serving the mortgage market,” says Kemp. “The price for the deal had been agreed upon a couple of months ago and that deal has been re-priced recognizing the severe impact on the mortgage industry. It was a double-digit discount.”

The tightening market affects transaction multiples as well. “That cumulatively has the effect of bringing down transaction multiples, because there’s a direct relation between transaction multiples and leverage multiples,” says Kemp. So the one or two point drop in leverage has corresponding drop in transaction multiples—to nine- or ten-times.

It’s All Cyclical
While pace, pricing and leverage have slowed, the financial community is reading the tea leaves to see how long the downturn will last. As this story went to press, the Fed made a half-point rate cut to stave off a recession, and it sent the market soaring. “The credit markets were too lenient and going forward they’re going to be far less lenient and that’s going to bring prices down a little bit,” says Phillips. “That will be a long-term effect.”

When the market is frothy, debt obligations get pushed to the limit and when there’s a downturn companies get caught—evidenced by the predicament Ziff Davis is currently in. “In a good economy, you’re pushing leverage multiples, and what happens?” says Kemp. “We have a recession and companies that were strapped with too much debt can’t support it with their businesses.”

Now, however, buyers will likely be more pragmatic with their buying decisions. “We’re clearly past the peak,” says Kemp. “And you know what? We’re in a healthier, long-term, more normalized environment.”