Roll-Ups, Exit Strategies and Magazine Publishing - Interview - Statistical Data Included

HOW THE RISE OF THE FINANCIAL PLAYERS HAS CHANGED THE INDUSTRY.

Dozens of private-equity companies have invested in magazine publishing over the last five or six years, with the big influx generally dating from the acquisition of Ziff-Davis by Forstmann Little in 1994 and the subsequent sale a year later to Softbank for about $1 billion in profit. From that point, the presence of private investment fund companies in the magazine industry increased dramatically.

Silber: Why the suddenly heightened interest?

FOLIO: recently gathered five industry experts (see next page for their identities) for a roundtable discussion in New York. Here is how the conversation went:

Andy Brownstein: We've been investing for a year in publishing specifically. We're a little different from the names you mentioned in that we are infinitely smaller than every one of those players in terms of our investment portfolio.

Financial players in general will find publishing attractive because it's one of the industries in which a lot of credit is available--meaning there are a lot of people who are willing to lend into that industry. There's a lot of specific expertise in the industry, so you don't need to educate your lenders as often as you would in other industries. And there are a lot of buyers and sellers, a lot of opportunities.

Hal Greenberg: People are attracted to magazine publishing and to trade shows because both offer relatively high margins and relatively strong growth. The media side has always been stronger than other parts of the economy. It's also a consolidation play. There are a lot of unconsolidated properties out there.

Jon Slabaugh: It has to do with the success of some early investments. The success that Hal's firm and MC Partners and Boston Ventures had in the late eighties and early nineties attracted a lot of the other players into the market. It's an industry in which access to capital really can make a difference in the value of a business.

Silber: Will consolidation continue to reduce the number of buyers and sellers?

Kevin Condon: There's still a lot of independents. When you compare trade publishing to other industries, there is still a high percentage of unconsolidated companies. Not just financial players but also strategic players are looking at concentrating in fewer markets, so there's going to be some reselling, or portfolio adjusting. That's a later phase of maturity.

Silber: As long as companies are paring their portfolios, you're going to have an active market of buyers and sellers.

Brownstein: The endemic growth of a specific magazine is not huge, so there continues to be interest in the acquisition market, especially in the specialty consumer area. One of the things private equity companies love about the publishing business is its stable cashflow. In other areas you're reinventing yourself or reselling every season to the retail channel. One bad selling season, and you're in a world of hurt. But in publishing, you've got diverse, stable cashflow. On the consumer side, you've got advertising, subscription, newsstand and ancillary product revenue. They don't all tend to fall off the cliff at the same time.

Greenberg: You have to reposition certain properties, but most people find magazine publishing fairly stable.

What Financial Buyers Look For

Silber: What are you investing in? What are the variables in making an investment?

Slabaugh: We have a real basic philosophy: "People, products and markets." We try to find management we believe in, whether it's a small or big company. Then we look at the markets they're in. We like to be in markets that are positioned to grow a lot faster. But sometimes, if you have great products and a great management team, you'll take a slow-growth market and you can create value in a lot of other ways.

Greenberg: One thing that is sometimes overlooked when a financial company is buying property is, "What is the ultimate exit?" We always ask ourselves, "Who is the next buyer of this property? Is there a buyer?" Value will come down unless there's an easy answer. They all say it'll be an IPO, but we all know that's not easy. You can't count on it.

Silber: What are the must-have qualities?

Brownstein: In the specialty consumer area, you want to be the place where advertisers go; you want to be the place where readers go for certain kinds of information, much like a trade magazine. You look for balanced, stable cashflow. And we're always buying people. The assets of a magazine company go home every day. We also look at growth-- growth in subscribers, growth in circulation in general.

Why Choose an Equity Backer?

Silber: Ted, why did you not opt for equity backing?

Ted Bahr: We basically used angel money. I was a group president at Miller Freeman, I was running 17 magazines, $100 million of revenue. I probably could have talked to people about doing a roll-up strategy around a large company, but my partner and I saw ourselves as throwbacks to a tradition where we could create. We had a history of creating at Miller Freeman and wanted to focus completely on the product, creating a launch from scratch.

Silber: Is that something that private equity companies generally don't do?

Greenberg: They shy away from it, at least without a platform. I'm a believer in launching if you own the platform first.

Slabaugh: This gets back to one of the earlier questions, have the acquisitions by private-equity groups changed the landscape of the publishing industry? We found they have; a great deal of internal product-development and launches over the last five years is the direct result of private-equity groups driving prices out of the reach of the traditional, privately owned publishing companies.

A $10 million or $15 million publisher who formerly relied on acquisitions to grow his business now has to bid against significant equity buyers. To maintain an acceptable internal growth rate and continue to generate their own wealth, closely held publishing companies have had to seek other alternatives. Being entrepreneurs, they are very good at figuring out what markets they're in and how to create new products to supplement those markets.

Managing the Build-and-Sell Message

Silber: Being owned by a financial player with an express intent to sell creates a lot of anxiety internally. There's also a more complex message you have to send to the market--you have to explain to your customers, your vendors, your audience the logic of a roll-up-and-then-sell plan.

Condon: Anybody in any company, not just publishing, who doesn't think they eventually are a candidate for sale is living in la-la land. It doesn't apply only to the portfolio of a private-equity group.

Brownstein: Nobody's under any illusion that we're not going to eventually exit the investment. That's our challenge: to keep the people as motivated and directed as possible. That's the CEO's job.

Silber: Is there a message that needs to be sent to the market? How do you explain to the people in these industries that you're going to amass this group of magazines and then sell it?

Condon: That's confusing the equity structure of the company with the management of the company. The fact that this category of investor is known by the term "roll-up" doesn't mean that they're going to sell it any sooner than a private owner is going to sell something.

Silber: The term "strategic owner" certainly implies that you're in it for a reason other than just to sell it.

Bahr: The best value has been created by a group that really believes in higher purpose and has a longer time frame than the financial players typically do. Look at ZiffDavis, the original one, and IDG and the original GMP before they got into an equity situation and kind of messed things up.

Brownstein: We've looked at magazines that have been in business 25, 30 years, that have been family businesses or entrepreneurial businesses, and there was great stability of personnel--and yet there was no dynamic to the magazine. The magazine was stale, the operation was stale, the way they were doing business was stale. They weren't well-run companies. There may have been low turnover, a stable organization and the people may have been highly valued by the people who owned the magazines, but that doesn't mean they were a good property.

Condon: It's not the investment structure, it's management. That's what drives turnover.

Bahr: Is there anything a financial buyer brings to the table that is going to be a benefit to the people beyond the CEO?

Brownstein: We certainly attempt to drive equity down deep into the organization. That can be a big difference. We believe in the power of equity investing, in the power of equity incentives. We like to have people all thinking the same way. It's not a perfect model, but it's better for everybody to be thinking about creating value in an organization.

Condon: It doesn't have to be real equity either--you can have all sorts of bonuses tied to all sorts of different things.

Greenberg: Also, a financial player can build the company a lot bigger. For those who are staying with the company and are entrepreneurial, it means a lot more advancement and movement.

Brownstein: I'm not going to pull the wool over anybody's eyes. At some of our organizations, there has been gut-wrenching change. I'm not talking about layoffs and firings--because we really haven't laid off and fired anybody, for the most part. But there has been change.

Silber: You all seem to feel so adamant about there being no real distinction between types of owners, but there are a lot of people out there who think it has everything to do with capital formation. What do you say to that?

Condon: I say they're wrong. And who hasn't worked for a crazed entrepreneur in publishing? You have to look to the culture that management creates. You can have a company with ownership structure behind it that can be almost invisible to the employees, but you can have a change in CEOs and that has sort of a radioactive effect. That changes the culture of the company much more quickly than what the debt-to-equity ratio is--that doesn't have anything to do with employees being happy.

Balancing Objectives: Cost vs. Efficiency

Silber: How do you balance your business imperatives? One person's efficiencies are another person's gutting of the business.

Condon: When I was at Advanstar, just on back-office operations and renegotiated vendor contracts, taking a look at how we handle our lists and how we batched and caged our orders and that sort of thing, we added four points to the margin--four points that we weren't expecting. That money didn't come from lopping off editors. This was all back-office stuff that came from renegotiating printing contracts, renegotiating paper, getting off mainframes, putting in PCs. And those were four points that stayed. They weren't a one-time hit.

Brownstein: We're doing that right now. We're buying magazines from a variety of different places. They come with their own trim sizes and paper stocks. We're going to try to rationalize some of these paper stocks. Some magazines, some of the editors, will see that as gutting a magazine because their paper stock may get reduced in quality, but another editor might say, "Hey, this is great. My paper quality is going up." As a manager, you can't win. You're rationalizing because you think it's the prudent thing to do. It's not cutting costs for the sake of cutting costs.

Greenberg: If you start to tinker around with any formula, whether it be trim size, paper weight or direction, you run the risk of alienating your market.

Bahr: To go back to growing the top line in the future, that comes down to the people. How do you keep the people involved, keep them motivated--because the financial people don't want to be operating the businesses. Also, how do you pass them on to the next generation when you sell?

Back-Office Consolidation

Silber: About consolidation of back offices: Does it become problematic in terms of selling on the other end?

Condon: I've consolidated back-office operations. You ought to centralize. There are different kinds of centralization, too--but I think you want to have the people that you purchased focusing on the market, you want them focusing on editorial, you want them focusing on the position of the magazine, you want them focused on the circulation mix, all of that. What you don't want them focused on is batching and caging orders; you don't want them focused on the fulfillment system.

Greenberg: Centralization really has nothing to do with who the owner is, whether it be a financial player or a pure strategic buyer--they all do the same thing.

Slabaugh: Financial players' compensation comes through increasing enterprise value, and that can't be done by ripping apart a back office. If you feel that's your financial partner's objective , then either you did not do very good value diligence in picking your financial partner, or you have got a massive communication problem.

How Broad A Portfolio?

Silber: Some financial companies buy a wide array of unrelated titles. Others target specific niches. Is there a correct approach?

Condon: For some roll-ups, there really isn't a cohesive thread throughout the company. You have to plan the theme of your company from the very first acquisition. You can't just acquire opportunistically.

Silber: What's Proximus' theme?

Condon: We have the advantage that we're brand new, we haven't bought anything. We can look and say, "Where do we want to be in this post-Web world?" We're looking at markets that are large economic sectors. I don't know that I want to be in 18 markets, but I'm also not sure that I would want to be in just one market with the whole basket riding on one segment.

You can go too far to the other extreme, too. It balances in the middle.

Slabaugh: I agree and disagree. The real home runs, as far as value, have been the companies that are an inch wide and a mile deep and have really done a good job of building complex relationships among their constituents-their advertisers, readers and editorial staffs. In each market the goal is to be as deep as you can.

Bahr It's a challenge when you have this real breadth. If you're an inch wide and a mile deep, you can go to a buyer and say, "Hey, we can build this position for you." That's what we're doing at BZ Media. We're totally focused on high-tech markets. We think that with the contraction of Ziff and CMP, there are going to be lots of fresh opportunities there.

How Involved Should Financial Owners Be?

Silber: Who makes the decisions--where do you draw the line between what the operating manager does and what the underlying objectives of the equity company are?

Brownstein: We are not in our offices making decisions about paper stocks. We serve as a sounding board. The financial buyers in the publishing industry are probably not that different from what they would be in any other industry in terms of major decision making--major personnel decisions, major capital expense programs, strategic direction, acquisitions, capital formation--things like that.

I don't get involved in day-to-day things and don't want to. The day that we're involved in those kinds of decisions means that we're having real problems.

Condon: CEOs are given more room to maneuver if they're doing well. But at the end of the day, the fund has its obligations to investors.

Greenberg: We're involved more in big picture stuff, but the CEO makes the decisions on whether this is a good acquisition or a bad acquisition.

Silber: There's a school of thought in the industry that says financial companies, fundamentally, don't understand the creative business. This is a business about people, it's about creativity--and financial companies, just because of what they are, don't understand. They're looking for a return on an investment at the end of the day.

Slabaugh: If you dismiss financial buyers as non-creative people, you've really sold short the financial community.

Preparing For the Exit

Silber: Let's talk about the exit. What happens after the roll-up? Who do you sell to next? Do you sell to another financial player? I would maintain that your next step would be to sell to a strategic player that wants to be bigger in that particular market. But the whole idea for financial players buying magazines is to cut expense out of the business. If you sell to another financial buyer, why would someone want to buy it if that cost has already been cut from the business?

Brownstein: There's always an opportunity for someone else to bring a fresh perspective into a business. We've bought businesses from financial buyers, and you ask yourself that question because you're expecting to get a premium when you sell.

Greenberg: There's a blur between what's a financial buyer and what's a strategic buyer. Is Primedia a financial buyer or a strategic buyer? Is Advanstar a financial buyer or a strategic buyer?

Brownstein: Primedia certainly is a strategic buyer now. Its capital comes through public markets.

Greenberg: What would you call Advanstar?

Condon: If you ask Hellman-Friedman, they're a financial buyer.

Greenberg: I think most people look at them as a strategic buyer because they bring a lot to the table in terms of the existing platform.

Bahr: The point is, where are you going to get the return? If the costs have been cut out, then the only return is strategic.

Brownstein: It's a cashflow business, too. If you're delivering a more stable cashflow to somebody, that will reduce the risk. Someone will pay you a premium for that. We look at magazines and we see where we can create efficiencies. That's where we can bring value to the table.

Granted, once we've done that, if we do it right, there's less for somebody else to do--not nothing--but less. Someone will be willing to pay us a premium for bringing a more professional business to the table.

Condon: I think the focus is going to be opportunity and value, and you run a risk if you cast it simply as a cost play. You can look at a market and a group of products and say, "These guys have a pretty efficient platform, but they're a good platform to bring other, less efficient things into." As opposed to saying that it's a bad deal because all the costs have been taken out. You have to take it case by case.

Brownstein: It may happen that we need to get out. It's got nothing to do with whether we think we've achieved everything we can. Sometimes it's simply time to return capital to our investors.

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