Ziff Davis CEO: Chapter 11 Final Step Toward 'End Game'
Industry reacts to tech publisher's bankruptcy filing.
In a dramatic but not altogether unexpected move, Ziff Davis Media yesterday announced it had filed for Chapter 11 bankruptcy as part of a debt restructuring plan.
The tech media publisher has carried a massive debt load since private equity firm Willis Stein & Partners acquired Ziff Davis' magazine division in 2000 for $780 million. Today, the company carries $380 million in long-term debt.
‚ÄúAt the time, it was a reasonable amount of debt but, as we all know, the market has changed profoundly,‚ÄĚ Ziff Davis CEO Jason Young [above, right] told FOLIO: in an interview late Wednesday. ‚ÄúWe transformed our business with the market but the problem was that we still had this capital structure and debt load that didn‚Äôt fit our business anymore. This announcement [Chapter 11] marks the final steps towards securing a platform that allows Ziff Davis to not only organically grow and thrive, but to grow even faster.‚ÄĚ
Young was tapped for the top spot last August, replacing Robert Callahan. Ziff Davis Media publishes PC Magazine and ExtremeTech.com.
Perhaps surprisingly, industry observers‚ÄĒsome of whom viewed Ziff‚Äôs financial troubles as the ‚Äúbeginning of the end‚ÄĚ‚ÄĒare, for the most part, viewing yesterday‚Äôs bankruptcy as a positive one. ‚ÄúEveryone has known for years that Ziff owed more debt than the company was worth,‚ÄĚ says Reed Phillips, managing partner of DeSilva + Phillips. ‚ÄúIt‚Äôs been tough going for the company but they‚Äôve stuck it out‚ÄĒthis move gives the company an excellent chance at surviving and rebuilding.‚ÄĚ
Tom Kemp, managing partner at Veronis Suhler Stevenson, agrees. ‚ÄúClearly this wasn‚Äôt a move they wanted to make but, by carrying an unsustainable capital structure and a debt load of that magnitude, it was inevitable,‚ÄĚ he says. ‚ÄúThe business has continued to trade down, especially in print. Eventually, if the company survives this period and is not abandoned by its customers, they will hopefully come out the other side with a capital structure that‚Äôs appropriate to their level of business, and they will be successful.‚ÄĚ
According to the announcement, an ad hoc group of senior secured note holders has agreed to pay up to $24.5 million, in what Young calls ‚Äúgo-forward equity,‚ÄĚ to fund the company‚Äôs operations during and after the Chapter 11 case. A major obstacle, though, is that the company was not able to reach an agreement with its junior note holders. ‚ÄúThey weren‚Äôt in disagreement on the notion of the business being delivered or being given capital to continue to drive digital growth,‚ÄĚ he says. ‚ÄúOn the other side of this, they simply were in disagreement over how much equity they would get. As hard as we‚Äôve tried to consensually get these guys to a reasonable split, it just wasn‚Äôt happening. Now, the court will have to answer this question.‚ÄĚ
Young hopes Ziff will emerge from the Chapter 11 case sometime this summer. It remains to be seen if that is an overly ambitious expectation.
‚ÄúZiff is taking its chances with the Chapter 11 filing, waiting to see what the judge decides,‚ÄĚ says Kemp. ‚ÄúIt‚Äôs a timely, costly process that puts the company at risk in terms of employees, vendors and customers. Bankruptcy courts have responsibilities to the creditors. The only people who really benefit are the lawyers and the restructuring specialists.‚ÄĚ
Getting to an ‚ÄėEnd Game‚Äô
Since the acquisition in 2000, Willis Stein & Partners has been trying to recoup some part of its investment, which has not been an easy process. In the fiscal year ended March 31, 2001, Ziff Davis Media reported revenue of $430 million after produced $535 million in 1999.
Ziff‚Äôs revenues took a dramatic decline following the dot-com debacle. In 2002, the company produced $209 million, with 99 percent of its revenue from print. In 2006, the company produced revenue of $181 million and EBITDA of $27.1 million, up significantly from the $17 million in 2005.
Last June, the company sold its Enterprise Group to private-equity firm Insight Venture Partners for $150 million. Two months later, Ziff announced that it was exploring options to restructure its debt and would not make a scheduled interest payment on its senior subordinated compounding notes due in 2009. The company retained corporate turnaround and bankruptcy specialists Alvarez & Marsal and Kirkland & Ellis LLP as advisors as part of the restructuring plan.
‚Äú[Yesterday‚Äôs] announcement is an effective tool that gets us to our end game,‚ÄĚ Young says.
Young declined to disclose the company‚Äôs actual revenues but indicated that fourth quarter 2007 digital revenues grew 25 percent and its digital audience grew 30 percent. Although the company could ‚Äúscale back or discontinue certain assets that no longer have a level of demand or economics that make sense,‚ÄĚ for now, Young says, there are no layoffs planned in association with the debt restructuring.
‚ÄúThis has never been about our operating business‚ÄĒit‚Äôs about our capital structure,‚ÄĚ Young says. ‚ÄúThe true assets of this business go up and down in the elevators everyday.‚ÄĚ