As credit markets tighten, multiples may dip a bit for b-to-b media deals

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Thomas O'Connor, a managing director at media investment bank Berkery, Noyes & Co., says the b-to-b M&A marketplace is in for some change. "[In] the next three or four months, you're going to see some declines in price; but overall, properties will continue to do well," said O'Connor, who recently brokered Thomson Corp.'s sale of American Health Consultants to Thompson Publishing Group and Adams Business Media's sale of its financial magazines to Highline Media. The tightening in credit markets may also put the squeeze on high multiples, O'Connor said. He recently talked with Media Business about M&A trends.

MB: What's your take on media M&A activity in the first half of the year?

O'Connor: For the first half of the year we really hit the plateau in the private equity buyout boom, and the market has cooled substantially due to the challenges in credit markets. Private equity firms, which have been driving the buyout boom, have had trouble borrowing X amount of leverage to do their deals. So a lot of deals have been potentially put on hold, or they're potentially renegotiating price or putting in more equity to the business. The opposite side of that is that sellers have to get more comfortable with potentially lower multiples.

MB: What are projections for the second half of the year?

O'Connor: There are a lot of deals in the pipeline [and] you'll continue to see deals getting done. They may take longer to get done and there may be more negotiation, but there's a huge amount of money to be spent by private equity. But I also think strategic companies may have an advantage because they have cash on the balance sheet. They don't need to borrow; they just write a check.

MB: What's your advice for b-to-b media companies that want to put themselves up for sale in the current climate? Ditto for companies that want to buy?

O'Connor: Sellers want to be cognizant of the changing credit market environment and what it's doing to valuations. They also need to quiz potential buyers on how confident they are on getting the leverage for the offer. For buyers who have been on the sidelines and want to get back in the game, valuations may come down from their historical highs but are still very good prices. If buyers don't overleverage and are prepared to put a lot of equity into the business, that's music to a seller's ears.

MB: Will private equity players continue to dominate the media M&A field?

O'Connor: For b-to-b media, you can't get away from private equity. But I think you're going to see semistrategic buyers—strategic executives backed by private dollars—do more tuck-in deals. A lot depends on the life cycle of private equity funds. If they're four or five years in, they're probably looking to get a liquidity event in the near term.

MB: Will online properties continue to get strong multiples or might they start to come down as the Web continues to penetrate business markets?

O'Connor: Online properties will continue to get very high multiples due to scalability and growth potential, which can eventually turn into cash flow. A lot of these properties are very early in their life cycles and have huge potential going forward. Online properties have better reach and better margins than other media.

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