No sale

Media M&A activity went into a deep freeze in 2008. Will 2009 be just as frigid?

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The credit crisis and uncertainty about print advertising's future combined to strangle M&A activity in the media sector in 2008. The pace of media M&A activity grew even slower at the end of the year—just 16.7% of 2008's deals took place in the fourth quarter, according to figures compiled by media investment bank DeSilva & Phillips. The late-year slowdown in deal flow makes many observers reserved in their outlook for this year. “Deals are not getting done because of two major factors: the overall uncertainty in the companies' outlook for 2009 and overall uncertainty about how to finance the deals,” said Roland DeSilva, co-managing partner of DeSilva & Phillips. “For the time being, financial buyers are somewhat hampered by the current situation in the commercial lending market, but this constraint should eventually ease,” said Richard Mead, managing director of media investment bank Jordan, Edmiston Group. Media investment bank AdMedia Partners conducted an online survey of 1,500 media and information deal-makers in December to gauge their expectations for 2009. Fifty-nine percent of respondents said they expected M&A activity in their primary business would be “weak” this year; only 4% predicted transaction activity would be “strong.” The anemic M&A performance last year certainly played a role in that pessimism. DeSilva & Phillips's report on 2008 called it—“An Unforgettable Year Not to Remember.” The firm tracked 109 deals in the media sector last year, down from 135 in 2007, a decline of 19%. The fall in the value of these deals was even more striking, dropping to $2.0 billion from $9.6 billion in 2007, a nosedive of 79%. Similarly, Jordan, Edmiston found that the number of transactions in the media, information, marketing services and related technology industries declined 13% last year, falling to 758 deals from 872 in 2007. The value of these deals fell even more precipitously, plunging 68% to $33.3 billion from $104.4 billion in 2007. M&A activity in b-to-b media's traditional strongholds—trade publications and trade shows—was dismal in 2008. The number of b-to-b magazine deals declined 46%, while the value plummeted 92%, according to Jordan, Edmiston. Transactions involving exhibitions and conferences fell 28% in volume and 31% in value. Despite the glum performance, DeSilva & Phillips pointed out that the b-to-b sector was healthier than consumer media in terms of deal-making. B-to-b transactions represented nine of the top 15 deals and about two-thirds of the deal value, the firm reported. “There are some deals getting done,” DeSilva said, “but those deals are being done by companies that are acquiring specific tuck-ins to their platforms.” As DeSilva & Phillips noted in its report, “The big story in 2008 is the deals that did not get done. The dollar volume of deals that failed, including Informa ($6.7 billion), Reed Business Information ($1.0 billion) and Cygnus Business Media ($200 million), among others, dwarfed the $2.0 billion volume of the deals that went through.” In the case of Reed Elsevier's unsuccessful attempt to sell Reed Business Information, industry observers say the deal was complicated by the credit crisis. But these observers also say the deal was derailed by uncertainty about the future of print advertising and how that might affect, in particular, the smaller print publications included in the properties for sale. And, in an era of “in-print, in-person and online,” the decoupling of the publications for sale from their related trade shows (which Reed Elsevier plans to hang on to by keeping Reed Exhibition Cos.) made RBI less attractive to prospective buyers. As for Cygnus Business Media, wrangling a credit deal has delayed the transaction. Industry observers say the company's expected sale price—in the neighborhood of $200 million—isn't a good sign for the b-to-b media industry at large, because ABRY Partners paid $275 million for the company in 2000 and has since acquired numerous other properties. “Several large b-to-b media transactions failed to close in 2008,” Mead said. “In each case, revenue visibility into 2009 and beyond was a significant factor that dampened valuations.” He said that visibility was affected short-term by the impact of the recession and longer-term by the evolution of the b-to-b business model. While the credit crunch has cast a chill on many deals, the scarcity of financing has also caused a shift in the character of deals that did get done. Last year for the first time since 2001, strategic buyers, who can rely on cash, accounted for a larger percentage (53%) of deal value than private equity firms and other financial players, according to DeSilva & Phillips. “Strategic buyers took the lead away from financial buyers in [the 2008] media deal market—unsurprising in this year of the credit implosion, with its absolute freeze on bank debt,” as the DeSilva & Phillips report put it. In its look at 2008 M&A activity, Jordan, Edmiston found that the market reflected the coming transformation in media and the shift in the center of gravity “from larger traditional media deals to midsize digital and data deals.” Jordan, Edmiston said that between 2007 and 2010, 88 cents of every dollar in media industry revenue growth will stem from four sectors: database and information, b-to-b online media, consumer online media and interactive marketing services. With this change came a shift in the deals actually completed, according to Jordan, Edmiston's analysis. For instance, the number of deals in database information actually increased to 46 in 2008 from 26 in 2007. And if Thomson's $18.3 billion acquisition of Reuters in 2007 is excluded, the deal value nearly tripled in the database information sector last year. Additionally, companies in the four growth sectors were more highly valued by buyers, as their average transaction EBITDA multiples were at least 13.5, while average EBITDA multiples for more traditional sectors didn't exceed 8.8. With the market apparently undervaluing traditional b-to-b media properties, many companies are interested in buying, especially if there are deals to be had in the current climate. M
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