The fact that ABRY Partners
took the rare step of going to the courts with a dispute over a M&A transaction is an indication of the depths of the breakdown between it and Providence Equity Partners over the $500 million acquisition by ABRY of F+W Publications
By going public, all sides;ABRY, Providence
, F+W management, and others;risk tarnishing their own reputations and the reputation in the M&A community of magazine companies in general.
ABRY earlier this month filed suit in a Delaware court claiming that Providence Equity and the Cincinnati-based F+W fraudulently represented F+W’s financial performance, causing ABRY to overpay for F+W when it acquired the publisher. F+W has about $250 million revenue and EBITDA of about $50 million.
ABRY is seeking a full rescinding of the deal or other damages.
“This is going to defcon three,” says one informed industry source. “This is going to be messy. You don’t get to this point unless things are really bad.”
In the suit, ABRY alleges that Providence and F+W overstated revenue for the first half of 2005 through a variety of artificial and fraudulent “schemes,” including offering “unprecedented and grossly abnormal discounts” to retailers who sell F+W’s books. In addition, the suit claims, F+W’s CFO ordered the managers at F+W’s British subsidiary to extend its June 2005 closing date, in effect moving revenue from the second half to the first half. Also, the suit claims, F+W shipped July newsstand issues in June and “back-started” subscriptions, shipping back issues of magazines to new subscribers.
Says the industry source: “It’s bad for the industry, it’s not good for Providence, it’s not good for ABRY. You have a large deal that’s gone bad;that creates concerns and red flags for the entire industry.”
What’s more, the source says, because of the size of the transaction, ABRY had to bring in co-investors, who would also be affected by this deal going sour. “If you’re doing a $500 million acquisition, they would have had to put in $200 million of equity and $300 million of debt, approximately,” the source speculated. “But ABRY might want to put in a maximum of $100 million. That means they would have to bring in co-investors to fill that other equity. And those co-investors are relying on ABRY to find deals for them and sign off on the returns.”
“It’s clearly a black eye for them.”
According to a Providence spokesperson, the firm is “very disapointed” and “categorically denies any wrongdoing related to the transaction,” adding that “Providence will vigorously defend the suit in the proper leagl forum.”
Representatives from ABRY and F+W declined to comment.