is in active discussions to sell parts of its 120-magazine enthusiast group, an informed industry observer said today, just days after the company announced
that it is exploring splitting itself into two separate public companies.
The enthusiast magazine unit, which is performing poorly so far this year in both revenue and EBITDA, is the main reason for a late-year downward re-forecast of EBITDA that was announced earlier this week.
With the sale in August
of the Primedia b-to-b group and the plan to split up the company in the next several months, some magazine-industry observers were speculating this week that a final liquidation of Primedia is now imminent.
“I think this is putting up the white flag,” the informed observer said. “Whether they do a spin-off or liquidation, at the end of the day they care about the value. It is still a consistent strategy in figuring out how to get KKR out of there. You’re down to the final two. Now it’s sort of the end game. It is a rational approach.”
Primedia flatly denied that a liquidation process is about to occur, and declined to comment on whether discussions were underway for selling elements of the enthusiast media group. “[Primedia chairman and CEO] Dean Nelson said on the record that there is absolutely no interest in liquidation,” said a source familiar with Primedia’s thinking who asked not to be identified. “I’m sorry, but I think Chicken Little comes out on Friday. It’s total drama and there is no substance to it. The company has always said if it found a buyer for certain pieces, it would consider that.”
It’s been an extraordinarily tumultuous week for Primedia;which was formed in 1989 as a unit of the giant private equity firm Kohlberg Kravis & Roberts;even by the standards it has set for itself. In addition to the prospective separation into two entities, Primedia said that CEO Kelly Conlin was leaving the company immediately and being replaced by chairman Nelson. It also said that it was revising its end-of-year EBITDA forecast downward from flat or slightly down from 2004 to a decline in the high single to low double-digit percentage range.
2004 EBITDA, not including the recently-sold Primedia b-to-b magazines unit, was about $223 million on revenue of $1.0 billion (again with the b-to-b unit backed out). The new forecast points to a swing in EBITDA of as much as $20 million, a fact that may have precipitated Conlin’s departure. “It’s a significant miss and a miss that makes Primedia very, very unhappy,” said one source familiar with the company’s thinking. “When the board hears after the third quarter that there is a problem in the third quarter, that’s problematic.”
It was more than that, though, the source added. Since his hiring two years ago, Conlin’s responsibilities never included Primedia’s guides or education businesses;those units reported to Nelson. Conlin was responsible for the $730 million enthusiast-magazine business and the $225 million b-to-b magazine business, which was divested weeks ago. Said the source familiar with Primedia’s thinking, “If you bring in a CEO whose primary focus is to fix the enthusiast business and two years later the business is performing worse, that’s also problematic.” For his part, Nelson in a press release announcing the move said, “The company is certainly in a better position today than it was when Kelly arrived two years ago.” And Michael Meltz, a Bear Stearns analyst, said Monday that, “Mr. Conlin has done an impressive job of rebuilding the company by streamlining operations, strengthening the balance sheet and refocusing on organic growth. We view his departure as a major loss for Primedia.”
In the proposed spin-off, Primedia said it wants to “unlock value for shareholders” by separating the businesses through a tax-free spin-off, where shares would be distributed on a pro rata basis to all shareholders. In the split, the company’s soaring guides unit would be separated from its enthusiast media and education units.
“PRIMEDIA has made significant progress over the last three years streamlining the business and reducing leverage,” Nelson said in the statement. “We believe the separation of these segments into two distinct businesses is the next logical step in the clarification of our long-term business strategy and that this plan would lead to greater growth opportunities and ultimately enhanced shareholder value.”
The guides business generated $155 million in revenue for the first half of 2005, up by 8.8 percent from the same period in 2004.
Disclosure: Primedia owns a minority stake in Red 7 Media, the parent company of FOLIO: and the M10 newsletter.
SEE ALSO: Conlin Out as CEO of Primedia as Company Contemplates Split