Richard Mead, managing director of Jordan, Edmiston Group, discusses prospects for M&A activity in the business media sector in 2010.
MB: Do you think M&A activity in b-to-b media/information will increase in terms of deal flow and deal value in 2010 compared with 2009?
Mead: We speak regularly with a wide array of b-to-b media and information companies, including the large global corporations, and our strong sense is that 2010 will see a healthy uptick in both M&A activity and overall deal value in North America and also globally. Many strategic buyers that are facing single-digit organic growth are actively looking for acquisitions that will push growth rates into the double digits. Private-equity platforms are likely to be sellers of b-to-b media and information assets, either as a delayed exit for a platform or to reduce their debt obligations within platforms. Those entrepreneurs who are keen to head for Hawaii—i.e., retire or take a break—will bring their businesses to market as soon as possible, after having put their exit plans on hold for the past two years. Another factor that should propel M&A activity in 2010 is the anticipated increase in the U.S. federal capital gains rate expected in January 2011.
MB: What sectors of b-to-b media/information will be the most sought after?
Mead: Any high-growth b-to-b media and information business that is situated in a robust and complex industry sector will have lots of suitors. Buyers are currently focused on recurring revenue (i.e., subscription-driven) models, as well as online lead generation, ad targeting and e-commerce products and services, which all help drive sellers closer to buyers at the time of their purchasing decisions. Leading advertising-driven marketing services brands—events, online and magazines (No. 1 in their markets)—are also attracting attention from buyers that want strong positions in key industry sectors. These assets will be attractive to buyers looking to invest in b-to-b media companies that are marketing-focused.
MB: Do you see private-equity funds making a resurgence as buyers of b-to-b media/information companies anytime soon?
Mead: Private-equity funds would prefer to focus on investing in growth assets rather than spend time and resources on financial restructuring. Private-equity funds looking to acquire b-to-b media assets will need to come to terms with the current financing environment, which requires a different acquisition financing model than the one they used in the mid-2000s. This includes investing a greater percentage of equity into each deal and paying a higher rate for debt, with stricter covenants. Financial discipline will lead to fewer tears all around.
MB: There have been a number of debt restructurings and bankruptcies among b-to-b media companies owned by private equity funds. To what degree do you expect more of these to occur?
Mead: The majority of the [private equity] b-to-b media and information platform companies that have either defaulted on their bank covenants or filed for Chapter 11 were profitable before slipping into the abyss. The general issue with these companies has been on their balance sheets, which were overloaded with debt and challenged financially. Both the banks and the PE funds need to share responsibility for this situation. There is considerable restructuring activity at present, as banks race to fix their own balance sheets by year end. Additionally, PE firms are scrambling to prepare for a wave of financings that will come due in 2012, following the heavy investing that took place over the past two to three years.
MB: Do you foresee a point when publishers will be able to charge more for online advertising?
Mead: With print magazines, advertisers have a fairly limited selection in their markets—generally, the No. 1 and No. 2 titles serving a given market. Online offers a proliferation of Web sites that all claim to be the marketing channel reaching prospective buyers. Plus, online media has the advantage of a very low cost structure for delivering ads. The large selection of online media outlets, along with low cost of ad delivery, has significantly pushed down prices across the Internet. Eventually, the cream will rise to the top, and those sites that have a dominant, respected and trusted position in the market will be able to increase pricing. M