Media M&A in 2010
2010 could mean the return of the strategic acquisition.
2010 can’t be as bad as 2009, can it?
If you’re talking about mergers and acquisitions within the publishing space, it certainly could be. According to the Jordan Edmiston Group, there were 615 transactions worth a combined $32 billion in 2009. The number of deals was down 24 percent compared to 2008 (while deal value fell 11 percent).
However, while JEGI contends that there was a strong rebound in media M&A in the second part of 2009, with $27 billion in deal transactions, the best performing sector was Mobile Media & Technology. Business-to-business saw a 9 percent decrease in the number of deals, although few deals in the fourth quarter drove a 750 percent increase in deal value.
However, the only “publishing media” deal that made JEGI’s top 10 list in 2010 was the $2.7 billion sale of Germany’s Spring Science+Businesss Media Deutschland GmbH to EQT Partners in December.
“The deal market in 2009 was almost non-existent when it comes to the magazine side,” says Larry Grimes, president of media advisor W.B. Grimes & Company. “I see some changes potentially in 2010 for the positive but only if existing publishers recognize the value in making strategic acquisitions. If that is gone, then there shouldn’t be much of a deal market.”
Distressed deals could continue to dominate. “What we saw more going on than we would of liked were distressed transactions—BusinessWeek was the primary example,” says Seth Alpert, partner and managing director at AdMedia Partners. “If you’re a seller, you’re just looking to get out from under. If you’re the buyer, you’re hoping your infrastructure and knowledge will turn someone else’s losing business into a money making business.”
Having been burned after the private equity feast of the past decade, Grimes says PE firms have little interest in the b-to-b space. “If they see magazine publishers recapturing advertising that was lost during the recession, then their tune may change,” says Grimes. “Right now, the PE guys who are making magazine deals are doing it purely from a financial standpoint—they’re buying very low with the thought that when the market comes back, they can get out in three to five years having made some money. There is no interest in the publications and frankly, that’s not good for the industry.”
Some buyers and sellers are trying to steer clear of bank financing after so many examples of companies acquired that turned out not to produce the cash flow needed to meet the covenants, and things spiraled out of control with the banks suddenly taking ownership.
“The flip side of that is they probably aren’t going to get any bank financing anyway,” says Alpert. “Private equity has relied on leveraging transactions through debt and it’s gotten to be quite challenging to do that. There was a time when big PE deals were done at 7x leverage but now that’s just not happening. Some of the businesses we’ve advised were 2-3x, now its down to 1x if its available at all. Deal structures haven’t changed as much as the numbers have.”
To Sell or to Shutter?
In 2009, the industry saw several examples of publishers shuttering magazines that were actually growing in advertising and readership rather than shop those titles or even accept offers that were made. Examples include Rodale’s Best Life, Hallmark Card’s Hallmark and Conde Nast’s Domino, with the owners giving excuses such as “We cannot justify continued investment” and “We have concluded that this economic market will not support our business expectations.”
But why not try to get some money back with a sale? In December, National Geographic was said to be quietly seeking offers for National Geographic Adventure, before announcing it would fold the print version while retaining the brand online.
“The reason you would turn down an offer is because it’s so low you’re better off terminating,” says Alpert. “In the case of a National Geographic ancillary publication, the biggest liability is likely subscriptions, which they can fulfill with other magazines. If the offer is not compelling, a shutdown may leave you better off.”
Others have to almost pay the new buyer to take the property off their hands—remember Macrovision loaning Open Gate Capital $9.5 million at a 3 percent interest rate to take TV Guide off its hands? “As painful as that may be, you’re going to be better off financially because the amount of money that would be lost would be less than in alternative scenarios,” says Alpert.
Online Deals—Getting Too Expensive for Traditional Publishers?
Attractive properties remain those with an online strategy in place that’s ready to be monetized.“If a property is in a good market and serves that market well and is in a lead position, there is still an opportunity to do those deals regularly,” says Grimes.
But the size of digital companies can be a problem—many are either too small to be attractive or too large to be swallowed by a publisher. “It appears that the digital media world is like the opposite of the bell curve—there are a whole bunch of people at the tiny end, a certain number of people that are at the high end, and then very little if anything in between,” says Alpert. “That’s not what you would expect in most industries. There is no middle in this market.”
But while publishers debate “build or buy” when it comes to ramping up their digital business, it may be harder to get deals done, particularly if a publisher is trying to buy a digital startup. Alpert cites digital marketing agency iCrossing, which turned down a $250 million offer from Hearst.
“Larger digital properties view their companies as very valuable—more so than a magazine publisher,” says Alpert. “That makes it problematic for publishers to buy companies because they will be paying valuations that may exceed their own.”
A strong e-media business is a requirement for most publishers but buyers are starting to be wary of situations where online revenue has stalled. “There are groups that will be sold and there are still be some private equity players trying to bottom fish the market,” says Grimes. “But as we transition from paper to the online marketplace, the online revenues are nowhere near catching up to what we have in print.”
End of the Large B-To-B Publisher?
While Reed Business Information’s attempts at divesting its magazine group may be the first publishing company to publicly acknowledge it’s trying to exit the magazine business, it may not be the last.
Shortly before the New Year, Folio: spoke to a source with knowledge of Nielsen who said that insiders were claiming the company was working on a deal to sell its three-magazine food group and that Nielsen’s travel group might also be on the block. The source said Nielsen most likely would use the proceeds from the estimated $70 million sale of its media and entertainment titles e5 Global Media and any subsequent asset sale to either reposition or shut down its remaining magazine properties.
In 2009 there was a surge of b-to-b publishers owned by private equity that were forced to consider covenant restructuring or even seek bankruptcy protection, including Cygnus Business Media and Questex Media which reached an agreement with a group of the company’s senior lenders to acquire “substantially all” of Questex’s assets, under a Section 363 sale process.
“We’ve heard rumors of companies divesting entire divisions in 2010,” says Grimes. “I can see a large publishing company realigning its portfolio, choosing markets to exit, and it wouldn’t surprise me if some of that took place. In previous years private equity stepped up but a lot of those guys got burned. Certain PE firms still believe in publishing. We had a meeting with a large publisher backed by PE who said they’ll go out and buy magazines but I’ll believe it when I see it.”
Meanwhile, smaller publishers are looking to take over where larger b-to-b publishers can’t sustain. In April, RBI shuttered all but one of the magazines published under its Associated Construction Publications Group, which consisted of 14 regional construction titles. That created an opportunity for John White, the original co-owner of the ACP titles (which were started by his ex-father-in-law), who continued to publish a newspaper for commercial construction in Indiana.
In late July, ACP re-launched Construction Digest and New England Construction and plans to bring back others in stages. White is facing a new reality with the magazines. At the time he sold them, collective revenue for the ACP titles was around $19 million. With the 13 he has now, he’s expecting about $5 million in 2010 but adds that his smaller operation could see greater profits than it did under Reed. “When you’re part of a larger corporation, there are many layers of overhead put on the magazines,” White says. “We don’t operate that way.”