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Advanstar sees time as ripe to weigh strategic options

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As is expected with private equity funds, a CSFB fund (formerly in the control of DLJ Merchant Banking Partners) has been preparing Advanstar Communications for sale since the day it bought the company in 2000.

Of course, that process has accelerated recently.

Advanstar confirmed last week that it is on the auction block, although industry observers said the recent sale of part of the company to Questex Media Group should have provided all the confirmation anyone needed. The closing of the deal with Questex, a group of Advanstar executives backed by investment firm Audax Group, was announced May 23.

"With the inefficiencies we’ve been able to take out of the business, with the outlook for our future pretty good, with a fairly robust M&A environment,and with the fact that we’re owned by a private equity company that buys and sells companies all the time, the timing seems right to see what our alternatives are," said Joe Loggia, Advanstar president-CEO.

That $185 million Questex deal, which observers say was about a 10-times EBITDA (earnings before interest, taxes, depreciation and amortization) multiple, was also designed to make the remaining Advanstar configuration more attractive to potential buyers.

Some have previously described Advanstar as "MAGIC and a bunch of stuff," but it can be argued that the Medical Economics acquisition and the rise of its power sports unit—coupled with the shedding of some units in the Questex deal—have strengthened the portfolio.

"The big question is will that [restructuring] make the business sell at a higher multiple," said one observer. "The answer is that the free market is going to tell you what they’re going to pay for it."

Advanstar as it is structured now generates about $275 million in annual revenue. The three units of the company are: fashion, anchored by the MAGIC trade shows; life sciences, anchored by Medical Economics; and power sports.

On the surface, Advanstar seems fairly well diversified, especially when compared with a company such as Hanley Wood, which focuses on construction and which sold at a multiple between 11-and 12-times EBITDA.

At the same time, however, Advanstar continues to rely heavily on the MAGIC trade shows, which are said to generate almost 50% of the company’s EBITDA.

Industry observers interpreted several recent executive moves at the company as designed to trim overhead costs. Advanstar confirmed, for instance, that Annie Callanan, formerly exec VP of the life sciences business, recently left the company. A company spokesman said she left voluntarily and that an internal replacement would be named soon.

Tom O’Connor, managing director at communications industry investment bank Berkery, Noyes & Co., said such moves can be indicative of a company preparing itself for sale. "That’s a telltale sign," he said.

Determining Advanstar’s ultimate value is difficult now, because of such changes in overhead cost—not to mention the sale to Questex—industry observers say.

Additionally complicating the scene is Advanstar’s debt load. As of March 31, Advanstar had $608.0 million in long-term debt, according to its 10-Q form filed with the Securities and Exchange Commission. Factoring in, however, the proceeds from the Questex deal, the debt load is currently closer to $520 million, an industry observer said.

Standard & Poor’s Rating Service recently put the company on credit watch with negative implications. The was due in large part to the potential sale of the company. But Advanstar's health also played a role, S&P said: "Advanstar’s rating was potentially vulnerable to a downgrade based on concern about its ability to generate sufficient cash flow to service its cash interest expense with the pending onset of cash interest payments on its holding company notes in April 2006."

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