The Magazine Industry saw private equity-fueled acquisitions grind to a virtual halt in 2009.

Even beyond magazines and media, private equity contracted in 2009. According to recent figures from Dow Jones LP Source, U.S. private equity fundraising last year closed its worst year since 2003 with 331 funds raising $95.8 billion, down a whopping 68 percent from $299.9 billion in 2008. Mezzanine funds raised only $3.3 billion for 20 funds, a decline of 92 percent compared to $43.1 billion the prior year.

Many major PE-backed publishing companies faltered under the weight of gargantuan debt, drastically reduced revenues, rising production costs and plummeting EBITDA.

“When you have a distressed situation, from both the private equity and company standpoint, you must focus on the short term—not just short term EBITDA but also cash flow,” says a CEO of PE-backed publishing company who wishes to not be identified. “When times are good and you’re hitting numbers, paying down debt and creating value, everyone loves you and your private equity partners are probably easy to work with. But dramatic times like these differentiate the value of those partners—how they respond in terms of interaction with publishing management teams and how creative they are about keeping the business going and reengineering the capital structure.”

A New Set of Rules

What’s left is a new paradigm for revenue generation. Publishers are still trying to harness and monetize new digital content distribution channels but the “ambiguity and complexity” involved in publishing’s technological transformation affects the number of investors who are active in the industry now, says Austin Ventures principal Matt Bowman.

“Today, greater emphasis has to be placed on evaluating the ‘what can be’ instead of the ‘what currently is,’ given how quickly the onset of digital distribution has taken hold and continues to constantly evolve and affect traditional print models,” says Bowman. Among Austin Ventures’ publishing assets are Complex Media and Asset International.

But having a well-defined digital strategy is complicated. “The common belief today is that magazine advertising is in a systemic decline not just a cyclical decline,” says Hal Greenberg, a partner at VSS Structured Capital. “The growth in Internet dollars has also slowed dramatically and does not even come close to compensate for the loss of traditional print dollars.”

Deal Volume Slow, But Not Dead

Although many PE firms now consider magazine companies cyclical, low-growth assets, acquisitions are still happening—for opportunistic prices. Late last year, Nielsen Business Media sold its eight media/entertainment brands to e5 Global Media, a new company formed by private equity firm Pluribus Capital Management and financial services firm Guggenheim Partners.

Another deal, in January, saw The Economist Group sell a majority stake in CFO Publishing to private equity firm Seguin Partners. “We consider CFO to be a high quality content provider,” says Seguin managing partner Martin Madden. “The magazine is an integral part of the business, as are the Web site, conferences and research. We and our management partners have high expectations for CFO over the next several years.”

A look at some of the larger PE deals that have been either renegotiated or totally wiped out:

The Reader’s Digest Association
Orig. PE Deal: 2007, Ripplewood Holdings, $2.4 billion
New Debt/Owners: August 2009, filed for Chapter 11 bankruptcy. Pre-packaged restructuring plan reduced its debt by 75 percent from roughly $2.2 billion to approximately $555 million. Ownership effectively transferred to lender group, including Bank of America, JP Morgan and GE Capital.

Publisher: Advanstar Communications
Orig. PE Deal: 2007, consortium led by Veronis Suhler Stevenson, $1.1 billion
New Debt/Owners: September 2009, reduced second lien debt and mezzanine debt by $385 million. Still carries $505 million in first lien debt. Majority stakeholders now VSS and hedge fund sponsor Anchorage Advisors.

Publisher: Cygnus Business Media
Orig. PE Deal: 2000, ABRY Partners, $275 million
New Debt/Owners: August 2009, filed for Chapter 11. Secured debt-equity exchange reduced debt from $180 million to $60 million. Majority stakeholder was GE Capital.

Publisher: Quextex Media
Orig. PE Deal: 2005, Audax Group, $185 million (Questex spun off from Advanstar).
New Debt/Owners:October 2009, filed for Chapter 11. A group of its senior lenders acquired “substantially all” of the company’s assets under a Section 363 sale process. According to its bankruptcy petition, its largest creditor was Wilmington Trust FSB, for more than $56.5 million in bank debt.