In the wild and fast days of 2007 when a record number of media deals were closing at record valuations, the acquisition process was well-oiled by massive amounts of debt at very favorable terms. Now, however, that very factor has reversed itself, drastically changing not only how deals are getting done, how many are closed and their value, but who’s doing the buying and selling.
“It’s definitely a buyer’s market,” says Jeff DeBalko, president, business media and chief Internet officer at Reed Business Information. “They hold the majority of leverage. There are, however, some incredible brands that are being sold and those sellers have real value to offer.”
The Credit Factor
Nevertheless, credit has an enormous impact on both the size of deals getting done and how many can get done. And this has had the largest impact on the ability to close deals. Buyers are not able to borrow as much money, which means strategic buyers can’t get as much financing and private equity can’t make deals as top-heavy with debt.
“The credit environment is clearly very different,” says Scott Peters, co-president with The Jordan, Edmiston Group. “Small- to mid-market debt financing has been very quiet, but it’s starting to come back. It’s a lot more conservative, meaning banks are not putting the kind of facilities together like they did in 2007. Strategics are finding that getting financing is harder and private equity can’t put enough equity in and that’s impacting valuations in general.”
And if you can get credit, it’s far below what used to be available just two years ago. “The best case is you’d get to 2.5x EBITDA on credit, if it’s available at all,” says Reed Phillips, managing partner of DeSilva + Phillips. “In 2007, it was 4 to 6x.”
And given the cash-strapped situation most publishers find themselves in, acquisitions have been pushed farther down the priority list in favor of organic growth opportunities. “Private equity is still very much involved in media across the board and they continue to look for opportunity but are certainly more conservative than in the past,” says DeBalko. “There may also be a bit of ‘keeping their powder dry’ waiting for valuations to drop further. Strategics need to balance how they use their capital and weigh M&A versus perhaps paying down debt or investing organically.”
Valuations are not settling down, which also impacts the deal process. While signs point to broader economic recovery, if slow, buyers are finding it difficult to pinpoint whether a category is still on the decline or on a rebound. This makes them nervous, and confidence is everything in this game.
“In publishing, given the volatility in both consumer and b-to-b, from a pure financing standpoint it’s made it difficult,” says Peters. “Volatility is a bad thing when you’re putting together capital structure. It’s a troubling environment for buyers because of uncertainty. Some categories have shown a rebound, some haven’t. People aren’t clear whether we’re at bottom or on a slope back up.”
Add to that situation a glut of distressed properties and the market is in for a very slow recovery in 2010. Observers note that the pipeline is still backed up with “must-sell” assets that will hit the market this year, which will provide inventory, but deal volume will hinge on credit and buyers’ ability to tolerate risk.
Getting It Done
In the meantime, buyers need to be more creative with financing options and remain picky about assets that are likely to win over a lender’s confidence—if that’s what it will take. Sellers have to mix patience with thoroughness. “If you’re thinking of selling, really do your homework,” says Peters. “Prepare for the sale, get audited and your financial records in excellent order—everything from legal to accounting.”
Creative credit solutions could mean turning the seller into the lender. “In some cases they’d like the seller to provide the debt financing since it’s not available from third-party lenders,” says Phillips. “They would say, ‘In the past I could have borrowed $5 million from the bank, so I want you, Mr. Seller, to be the bank.’ It gets negotiated, but it’s not generally the preference of the seller to provide that.”
Since there’s more than the usual risk out there, buyers are being much more conservative in their due diligence, often taking longer than normal to complete it. Sellers, therefore, should mitigate that risk by keeping their end buttoned up. “Buyers are probably as conservative as I have ever seen given the volatility in the marketplace, but for smart companies, the due diligence process has not really changed. They are all doing their homework and the experienced ones are doing it extremely well,” says DeBalko.