Is Private Equity’s Interest in B-to-B Raising Sale Multiples?
Private equity has played a major role in the M&A action in the magazine industry for years and its involvement has increased dramatically in the last seven years.
According to The Jordan, Edmiston Group, Inc. Transaction Database, private equity firms were involved in 112 deals in 2006, a 119.6 percent increase compared to the 51 private equity deals in 2000. Strategic buyers and sellers, on the other hand, accounted for 442 deals in 2006, a mere 0.6 percent increase from the 439 deals made in 2000.
The presence of private equity in the marketplace has rocked the industry. With more players on the field, companies can raise their asking price, as described in a multiple of either revenue or EBITDA. "You could point to increased valuations as the consequence of private equity’s involvement in the industry, but really it’s a reflection that a quality business is coming on to the market," says Richard Mead, a managing director with JEGI. "There’s a lot of capital going into private equity and bank debt is low, so they can get better returns by leveraging their investments."
It’s the availability of debt in the industry that many M&A experts credit to the multiple upswing. "What’s having a bigger effect on multiples than private equity is the availability of debt and the amount of leverage both in terms of senior leverage and subordinated debt that lenders are willing to put on b-to-b media companies now," says Tom Kemp, managing director at private equity firm Veronis Suhler Stevenson. "That’s really driving the multiples more so than the fact that there are a lot of private-equity buyers out there."
B-to-b: The Private Equity Hot Spot
In the first quarter of 2007, JEGI reported that b-to-b magazine transactions were flat, but values were up. A total of nine deals in the first quarter of the year accounted for $634 million, compared to 10 deals worth $136 million in the same period last year. "Private equity’s interest in b-to-b companies has been the relatively stable cash flow," says Kemp. "There’s been a strong recovery in M&A in the b-to-b media market in the last couple of years driven by a combination of accessible debt financing and increased equity commitment by private-equity companies, as well as a stable economy and growth in b-to-b media in general."
Publishing’s relative lack of major working fixed capital expenditure requirements make both b-to-b and b-to-c companies attractive to private-equity buyers. But, it’s b-to-b media’s vertical market focus that makes it even more attractive than b-to-c media. "With b-to-b, if you’re trying to create a new magazine for left-handed ditch-diggers you could find them if you wanted to," says Mead. "If you wanted to you could launch new products, and depending on market, it won’t cost you that much."
B-to-b tradeshows are also an attractive asset to private equity, especially compared to consumer shows, which are straining to generate interest. "Consumer shows are struggling at the moment," says Mead. "With the Internet as an increasingly go-to source for consumer-product information, attendees are not going to consumer shows the way they are with trade shows. Thus, b-to-b shows are more valuable."
The industry’s optimism surrounding growth prospects, particularly in e-media, is one reason for the surge in b-to-b multiples, says Peggy Koenig, managing partner at ABRY Partners. The other reason is, "a very robust capital and leveragability market, which is helping underpin some of the lost year valuations that companies are achieving," according to Koenig.
Still Room for Strategics
The presence of private equity, however, doesn’t leave strategic players (private or public companies that are not owned or backed by private equity) on the bench. "Strategics can avail themselves to the same capital-market availability as private-equity buyers can, it just depends on what their target rate of return is," says Koenig. "If strategics have a higher target return, then that will leave them on the sidelines, but if their target returns are comparable to where some private-equity buyers might price their returns then they can be competitive."
Some strategic companies have the advantage of converging existing products with new companies and brands. In February, JEGI represented Adrian Courtenay, owner of DMNews, in its sale to Haymarket Media, a publisher specializing in the public relations and marketing industries. The deal was one of many transactions where b-to-b strategics came out on top. "Strategics have all sorts of operating synergies, just like a private-equity firm that has already bought a platform," says Koenig. "Look at Bonnier [Magazine Group]; they are a strategic and they are certainly actively pursuing companies."
PE Buying Activity, 2000 v 2006
- 2000, # of deals
- 2000, % of deals
- 2006, # of deals
- 2006, % of deal
- 2000 vs 2006, % change
Strategics and Other Buyers
Source: Jordan, Edmiston Group