Why the Big B-to-B Model is Broken

Reed Elsevier shocked the industry in 2008 with the announcement that it was putting Reed Business Information on the block. RBI shocked fellow publishers again just last month, when it said it would shutter its remaining 23 unsold magazines (and most of the related digital properties)—although by some accounts, it looks like RBI never intended to sell those titles anyway.

Meanwhile, Nielsen Business Media has spent the past year trimming down its portfolio piece by piece in order to focus on its research and measurement services. Elsewhere, it seemed like hardly a week went by in 2009 without news of a large b-to-b player, overleveraged and carrying enormous debt, forced to declare Chapter 11 or at least skirting along the edge of bankruptcy before all stakeholders agreed to a restructuring.

Today, many of the largest U.S. b-to-b publishers  are, by their own accounts, facing the future with new structures and more manageable debt levels. But the fact is, even after restructuring, many are still carrying dizzying levels of debt that may require additional restructurings down the road. And with private equity ownership looking for a return, and very few buyers out there willing to take on even more debt, many large publishers face the same fate as Nielsen and RBI: whittling down assets through sales or closures until there’s little left of the original publishing company. Others could follow the model of the former Ascend Media, which gradually sold off piece by piece, with founder and former CEO Cam Bishop buying back the rights to the brand and launching Ascend Integrated Media around the event and custom publishing assets.

“Almost every one of these restructurings leaves debt on the books that, as a multiple of cash flow, is equal to or greater than the value of the business,” says one b-to-b CEO. “There is a serious risk that another round of restructuring may need to take place in the two-to-three year horizon.”

Some observers think a gradual sell-off is the only reasonable outcome. “I don’t see how they can avoid [going the same way as Nielsen and RBI],” says Rob Garrett, founder and former president of AdMedia Partners and  president of private investing and financial advisory company Rob Garrett and Sons. “They’ve restructured but still have a lot of debt. I don’t see them being able to sell the whole company. Nielsen was smart enough not to even try. What does a company like Penton do? For a while, nothing. You hope the improving economy and the ability to run the business make the values higher. But then what? I find it hard to see what the alternative to drive value for their investors would be.”

It’s a situation not necessarily limited to the b-to-b behemoths. “Summit Business Media was leveraged up. They will steer through this, but debt could be impaired. Jobson may have rumblings,” says one b-to-b CEO. “More broadly, there’s a concern that lenders are kissing the bullet, not biting it, when it comes to taking write-downs.”  

And if interest rates go up, that could mean serious trouble for overleveraged publishers. “With companies like Penton and Cygnus, the real issue is how leveraged they remain, and the terms of those loans,” says Dan Ramella, president of Harbor Communications (and former Penton Media president). “While current levels may show they can handle the debt service with low interest rates, they still might be at risk if rates start to click up.”

The financial structures may be undermining the core products themselves. “I think the core value of the business is obscured by financial dark clouds that hang over the b-to-b category,” says IDG Communications CEO Bob Carrigan. “Clearly, overleveraged deals were a huge burden. You’re bleeding for cash with little investment to launch new things. When you’re constantly trying to meet covenants it’s difficult for operating folks to be successful. We’ve seen this happen with so many great companies—they’re basically in asset sale mode. A lot of them feel like ‘it’s not a growth business anymore.’ Maybe it’s not a growth business anymore because you’re not really investing in areas of business that represent real growth.”

End of the Old “Economies of Scale”

Beyond the problems of being overleveraged and in debt, many of the larger publishers are based on obsolete operating structures. As traditional print vehicles are replaced by multimedia and strategic services, the economies of the current structures no longer work (in March, Advanstar announced that it had struck an agreement to outsource its production-related functions for the company’s magazines and directories to global IT services company HCL Technologies, resulting in the elimination of approximately 100 employees at its Duluth, Minnesota, facility).

“It seems to be that the economics of building a large b-to-b animal with multiple titles doesn’t necessarily click anymore,” says Garrett. “What do you get? A shared back office with human resources, finance, production and a centralized circulation department. But beyond a certain point, you begin to develop a bureaucracy. That impacts the performance of individual titles and even stifles growth—particularly with a public company—because they have earnings levels to meet, or if it’s a large private company with expectations or wishes to go public and they’re trying to build a P&L record.”

In February 2008, United Business Media announced the restructuring of CMP Technology into four separate businesses led by four co-CEOs. The four new businesses share support functions like finance, IT services, legal and global account and sales management. Accounts payable and receivable are part of centralized shared services. Audience development and HR roles are handled on the divisional level.

Two years later, UBM CEO David Levin says the restructuring was the only option. “It wasn’t a choice around the old technology businesses, it was a piece of organizational design, which we deployed in multiple markets,” he adds. “An old magazine publishing company had various things that led you to a highly centralized structure. Those are the economics of large-scale mass production and distribution of magazines with classic departments like circulation and production. Five years ago, print accounted for two-thirds of the revenue of this company. Now, less than 5 percent of profits are attributable to the magazine businesses. The core requirement was to move the organizational structure and engage in a different way, and create a structure that allowed for scale without required centralization.”

Is the Conglomerate Model Still Viable?

Historically, building scale for a b-to-b publisher often meant entering several different unrelated markets (Penton Media lists 17 markets served on its corporate site, ranging from agriculture to wealth management).

Today, publishers are split on whether that multi-market approach still works. “I think it’s a difficult model,” says Bill Pollak, CEO of ALM, which focuses on the legal market (and which in 2009 was spun off as an independent company from U.K.-based owner and financial publisher Incisive Media, which went through its own reorganization and refinancing). “This idea that we can take a group of markets and put them under one umbrella and think we can create cross-market synergies sounds great on paper, but I don’t think it really happens. It’s very difficult to get people in different market segments to work together.”

It’s also a different marketplace. “I also think we’re in a private equity world,” adds Pollak. “The world when some of these businesses were put together was the pre-private equity world. Back then, you wanted diversity. PE owners don’t necessarily want you to diversify, they’re going to diversify. Why should a company like ALM be in six different businesses?”

Some executives think the shift away from traditional publishing services makes the multi-market approach even harder. “Being in several different unrelated markets is difficult in this economy,” says Ron Wall, senior vice president of publications at Canon Communications. “With lead generation, database, custom digital/print and immediacy of message being the focus of so many marketers the only way these can really be achieved is having several strong and focused assets that solve a customer’s entire needs.”

Others think diverse markets do work. “Yes it can work, but each publication (even within the general market cluster) should be left on their own when it comes to how they sell and serve the market,” says Carrigan. “There is nothing inherently wrong with unrelated markets. In fact, the cyclical nature of most markets should help the company smooth out the overall results of the company as each of the unrelated markets go through their own cycle.”

While UBM is best known for tech publishing, it also has significant publishing, exhibition and database businesses in areas like cruise shipping, health care and global trade. “I’m a firm believer in the multi-sector approach,” says Levin. “The question is, how do you get economies of learning since you no longer have production economies?”

Reinvention Versus Cost Control

When Cygnus announced it was entering a Chapter 11 restructuring last August, one poster at Foliomag.com wrote:  “We’ll know when they emerge from this, if they are serious about their business: Get rid of the dead-weight management, bring actual talent back, re-establish the core values that have been lost some time ago, and do business based upon principles that leave room for integrity and ethics, as well as profits.”

That poster summed up the fact that while it’s easy to talk about change, it’s much harder for publishing executives (and owners) to take the steps necessary to enact it.  

In Cygnus’ case, the company named former Penton chief executive John French as the replacement for departing CEOs Tony O’Brien and Carr Davis and emerged from Chapter 11 on September 21, 2009.

“A big part of this job is being in front of employees and customers and telling them what the story is,” says French. “We had a balance sheet problem, we were carrying a debt load that was unmanageable for the size of the company and the previous leadership was not good. We reduced the debt from $180 million to $60 million, the business is improving and we’re bringing resources in.”

That includes significant investment, according to French. Cygnus has hired a new CFO and is currently looking to hire a new vice president of digital strategies. “There was nothing wrong with the properties except two things: they were starved and they had a PR problem,” says French. “We’re investing hundreds of thousands of dollars now and that will increase a lot in the next year or two. A year or three from now, people will look back and say, ‘Damn, those guys did it.’”

French says Cygnus made some incorrect technology decisions and is now investing money in infrastructure and software. On the print side,  the company has hired book and magazine designer J.C. Suarez. “The editors love it—nobody had talked to them in years, or if they did, it was just, ‘Do this Webinar, do this e-newsletter,’” says French.  

Cygnus’ current debt load is manageable, according to French. “We make our payments and we’re in very good shape in terms of cash flow,” he adds. “When we were at $180 million, it was a real problem. Since coming out of Chapter 11, it hasn’t been a problem, all our cash forecasts are positive.”

Dealing with the corporate culture can be the biggest challenge for large b-to-b publishers that have been forced to make massive cuts, both in budget and personnel.  

The Cygnus culture has been particularly toxic (judging by comments at Foliomag.com) and French says he’s made it a priority to fix this. “Improving morale is the biggest challenge we have,” he adds. “That takes time and people seeing the proof.”

That also means being straightforward about the company’s direction. “We can’t tell people we’ll be here forever, that’s crazy,” says French. “But on a day-to-day basis, we’re making the investments to put value back in the company. If we don’t improve it, we’ve done nothing. That said, our owners are banks and we’ve been honest with employees. Banks are not strategic buyers and this company will be for sale again in three or four years. In the meantime, our instructions are to get value back in company. I’ve made it known I’m not just here as a turnaround person. I want to go where this company ends up and lead its next iteration.”

Print wasn’t the only dark spot for Penton Media. In an April 2009 memo announcing the reduction of the summer work week from five to four days, CEO Sharon Rowlands said that the company wasn’t showing growth and that “advertising. . . has not only collapsed in print, but as a company, we haven’t shown the growth we should on the Web. Penton is really tracking a long way behind the industry in terms of percent of revenue that is digital, and we are not showing growth.”

Improving the sales process is a priority. As part of a roundtable discussion at the DeSilva + Phillips Dealmakers Summit in February, Rowlands said that, “Only a fraction of the publishing sales force today is capable of communicating effectively to clients.”

Less than a month after undergoing a pre-packaged reorganization designed to reduce the company’s debt by $270 million, Penton Media emerged from Chapter 11 in March. In addition to the elimination of $270 million in long-term debt, Penton received an extension of the maturity on its senior secured credit facility through 2014. However, the company’s previous debt was estimated at close to $1 billion.

“We’re seeing improved performance so far in 2010,” Penton CEO Sharon Rowlands told Folio:.  “Our digital business is performing strongly. Print remains weaker but improved in the last quarter of 2009. Custom marketing services are performing strongly. Trade shows vary show by show. We’re fortunate that our two largest shows are in the natural products area and our third largest show is in waste management—those are all sectors that are holding up pretty well. I’m starting to feel pretty good about 2010.”

Questex Gets Fast Start Out of the Gate But What’s Next?

Questex Media Group Holdings filed for bankruptcy in fall 2009 and said that the company’s senior lenders were expected to place a bid to acquire “substantially all” of the company’s assets, under a Section 363 sale process. The agreement, Questex said, also would provide “significant financing,” including debtor-in-possession and exit financing, which will be used to help finance the company’s operations. In December, Questex emerged from Chapter 11 with a new name (Questex Media Group LLC)

Through the first quarter of 2010, Questex has seen some improvement, including hosting 10 major trade shows and events and meeting audience, customer and financial targets on each one, according to CEO Kerry Gumas.  

“Questex has continued to execute on its business plan,” he adds. “We have a much more flexible organization today as a result of process changes we made and continue to make to the business. We significantly reduced our fixed cost base allowing us to yield relatively significant increases in profits from modest revenue gains. This allows us to continue to invest in organic business development and launch initiatives, reserving available capital resources for more strategic uses. Our objective is to drive value creation for all our stakeholders—that’s a given—but the U.S. economy is by no means out of this recession yet. So, we’re as concerned about managing through short-term shifts in demand as we are about long term-strategy and managing our portfolio and balance sheet accordingly.”

Gumas acknowledges that the  b-to-b business model has changed and the company has to make strategic choices about customer markets, platforms and revenue models.

“I think consolidation strategies will always be important in this industry, but so will specialists,” he says. “So I’d say, yes, you will continue to see acquisitions and divestitures as companies make strategic choices about where on that matrix of markets, platforms and revenue models it’s most effective to compete. The industry’s moved beyond competing narrowly around ad- or subscription-driven print models. I think five years from now b-to-b publishing will be further transformed with a much more diverse range of b-to-b service business models facilitating commerce by serving everything from mass market b-to-b audiences on a global scale to highly specialized information and very finite 1-to-1 buyer-seller interactions via very dynamic platforms.”

For full-year 2009, the revenue for McGraw-Hill’s Business-to-Business Group decreased 8.6 percent to $872.7 million. Revenue growth at the Platts news service for the global energy market was offset by weakness in advertising, softness in the construction market and declines in the automotive sector at J.D. Power and Associates.

Still, b-to-b remains essential, particularly as McGraw-Hill expands its “information services.” “Long term, that’s where b-to-b is going,” says Glenn Goldberg, president, McGraw-Hill Information. “We are putting various capabilities into comprehensive offerings. Look at Platts. Forty or 50 years ago, Platts was reporting on energy markets. Over the last 20 to 25 years, they migrated to being a news, pricing and analytical leader. News is part of it but so is data and that allows you to be more embedded in your customers’ workflow and be effective and aggressive in the pricing you want in that space. The days of being a solo provider—only a magazine publisher or only a news provider—are gone.”

IDG, which has avoided making highly leveraged acquisitions, is one of the publishers aggressively pursuing new products from custom to databases to marketing services. But the fact remains that these services require significant investment.

“There is tremendous opportunity to leverage our databases, or our information or our brand to build new businesses,” says Carrigan. “But that does take resources and a focus. In a lot of cases are these media properties to be nurtured, or assets that need to be shed in light of a restructuring?”  

The fact is, many bank-owners haven’t shown a willingness to exit declining, but profitable product lines to free up management’s attention on the potential market winners.

“It didn’t seem like Penton took out as much debt as they’d like to have,” says one publishing executive. “If they have upwards of $600 million or $700 million in debt remaining, they’re still at risk of going through a further reorg. That makes it difficult to reinvest in the business. While you talk the topline, you really focus on the cost side. Now, publishers will make plays and they will make investments, but it will be selective.  It will prompt them to look at their portfolio and pare off things they don’t see much future for.”

When making covenants is the priority, that doesn’t leave much room to get creative. “I don’t believe anyone sits around a table and strategically works toward not improving themselves or trying to build value,” says Wall. “I know so many people inside our large companies and trust me—they haven’t given up. This is an industry that has some very smart people who want to win and compete. They have to make their ‘house payment’ first and that does make it hard to build something strategic more than six months out.”

How Does This Affect the Exit Plans Of Everyone Else?

The gradual whittling down of the large players could have ramifications for the broader industry, particularly as current owners look to sell down the road. “The issue to me is, let’s say you’re Doug Manoni, taking over Source, or Charlie McCurdy at Apprise. Where do they go when they decide they want to sell?” says Garrett. “They can go public, which isn’t necessarily a good move, or they can try to find someone to sell to.”

Last month, the Jordan Edmiston Group released a report that said the number of deals in b-to-b media in the first quarter of 2010 was 14 (worth $7 billion), compared to just three deals worth $5 billion in the first quarter of 2009. However, much of that activity has come from distressed sales. In the first quarter, Nielsen sold Editor & Publisher, Kirkus Reviews and its Travel and Food Groups while RBI sold EDN, Design News, Packaging Digest, Test & Measurement World, Library Journal, School Library Journal, Interior Design and the Furniture Today Group.

Several of the recently folded RBI titles are expected to sell as well. In late April, a group of former RBI employees bought RBI’s four Supply Chain Group brands: Logistics Management, Modern Materials Handling, Supply Chain Management Review and Material Handling Product News.

The price on many of these sell-offs can be right for smaller publishers looking to ramp up in certain areas (and the price could be even better with shuttered products that are sold later). “The valuations are low, we’re not talking 8x, we’re talking 4x for a small company,” says Garrett. “There are people who are making acquisitions—such as Harry Stagnito, who bought several Nielsen books. My concern for Harry is, five years from now, who is he going to sell it to?”

Good for the Industry?

Others see a new round of investors emerging. “I’ve been in b-to-b for 30 years and have been owned by private companies, public companies, private equity and a single bank,” says Wall. “We are in a business that generates good revenue from multiple sources and has minimal capital assets and EBITDA margins that are, for the most part, above 18 percent—how many other industries can say that? It may be hard to say today, but a new group of investors will find b-to-b a nice asset.”

Others see new potential for small and mid-sized publishers. “I think you’re going to have a much flatter pyramid,” says one b-to-b CEO. “There will be fewer of the big guys at the top. From an association point of view, that’s a terrific thing. I think American Business Media was overly influenced by five or six big guys and now has an opportunity to provide assistance to small and mid-sized players who need help with lobbying and professional education. That will be great for ABM, maybe not in the short-term with dues but in the long run, absolutely.”

 
SIDEBAR

Did Reed Ever Really Plan to Sell the Titles It Closed?
Sources say shuttered titles were never brought to market.
By Jason Fell

London-based Reed Elsevier rocked the trade magazine publishing world when it announced last month that it was shutting down the last 23 titles published under its Reed Business Information U.S. division that it did not sell or intend to keep. Knowledgeable sources, however, tell Folio: that Reed never had any intention to sell those particular titles on the open market.

The shut-downs follow a nine-month period during which Reed said it put nearly all of the titles published under RBI U.S. back on the block, after a failed auction of the entire unit in 2008. During that time, the company managed to sell 20 titles, which it says collectively accounted for approximately two-thirds of the overall revenue of the portfolio it was divesting. The company intends to hold onto noted Hollywood trade Variety, Reed Construction Data, Marketcast and 411 Publishing, as well as Buyerzone, a lead generation business.

Following the announcement, a Reed spokesperson told FOLIO: the company would be open to discussions with potential purchasers of the intellectual property associated with any of the closed down brands. But questions came up regarding whether those titles were ever actively up for sale.

“So far as I know they were never brought to market,” says Frank Anton, CEO of construction trade publisher Hanley Wood. Among the titles shuttered by RBI were Building Design+Construction, Construction Bulletin and Construction Equipment. “Had they been, Hanley Wood would have taken a look at select assets in RBI’s construction portfolio.”

“The only explanation [for not bringing the titles to market] I can think of is that Reed intends to build a strong data presence in those markets and doesn’t want anyone competing with them,” says one source who wishes to remain anonymous. “It’s what we are now calling the ‘Gourmet Magazine Must Die’ syndrome. Condé Nast owns Bon Appétit and couldn’t allow anyone to compete against it—they had no other choice. They had to kill Gourmet.”

Or did management decide the process would be too big a distraction without a meaningful upside? When asked if Reed did in fact actively try to sell the shuttered magazines, the company spokesman said “our preference was to sell the titles rather than close them.”

Offers Rebuffed

But Adam Schaffer, president of media sales and consulting firm Media Revenue Partners, isn’t so sure. A former publisher of Tradeshow Week (one of the shuttered titles), Schaffer says he had contacted RBI about purchasing the magazine but was never given a solid response either way.

“I was publisher of the magazine from 2002 to 2007, so I am intimately familiar with the brand, its P&L and its opportunities,” says Schaffer. “At one point I even offered to buy the magazine as-is, without going through the usual due diligence, but was never told yes or no. I was kept in limbo.”

Schaffer says the conversations never progressed to a price negotiation phase. “This is a great argument about why big companies shouldn’t own too much media,” he says. “For a company like Reed, that makes so much money off Reed Exhibitions, to turn around and shut down the magazine that serves that market, you have to wonder how committed they are to the industry.”

Post Comment / Discuss This Story - Info/Rules