Tight credit market contributes to downturn in private equity purchases BY SEAN CALLAHAN
The story of Entrepreneur Media's abandoned sale to private equity firm Austin Ventures reflects, in microcosm, the current state of the mergers and acquisitions market for b-to-b media.
Shortly after Austin Ventures agreed to buy Entrepreneur Media, the deal fell apart. In late July, Entrepreneur Media CEO Peter Shea wrote an internal memo that blamed, in part, the credit market for the collapse. He wrote, “The debt market has made it a very difficult market for buyout funds to raise debt financing at a reasonable multiple and percentage rate.”
Industry observers agree that the tight credit market has been a key contributor to the sluggish b-to-b media M&A market. “I think that what's impacting deal volume is first the credit issue,” said Reed Phillips, co-managing partner of media investment bank DeSilva & Phillips. “That's mostly impacting private equity firms and not as much with strategic buyers.”
Reed Elsevier's $4.1 billion acquisition of database information company ChoicePoint, which was the largest media M&A transaction in the first half of 2008, seems to prove Phillips' point that strategic buyers, rather than private equity firms, have the financial power to get deals done in the current climate.
So with a $4.1 billion deal being consummated, just how sluggish is the media M&A market? Well, it wasn't as weak in the first half of this year as some had feared.
The number of media deals overall actually increased in the first half to 404, up from 397 in the first half of 2007, according to data supplied by Jordan, Edmiston Group. The weakness in the market revealed itself in the combined deal value, which plummeted nearly 65% to $23.2 billion, from $65.8 billion in the first half of 2007, according to Jordan, Edmiston.
The firm's data indicate that a key driver of the decline in deal value was an absence of blockbuster transactions. There were only four deals valued at more than $1 billion in the first half, compared with 11 in the first half of 2007.
“The credit crisis has certainly affected deal flow/value, as lenders are offering reduced leverage to potential buyers and lenders are stricter in their due diligence, meaning they will pass on financing companies that fail the quality and profitability test,” said Michael Marchesano, managing director of Jordan, Edmiston. “As a result, the appetite for bulge-bracket transactions has fallen off significantly, with the exception of a few transactions, like Reed's acquisition of ChoicePoint.”
The b-to-b media M&A market seems especially weak. The number of b-to-b magazine deals fell to 11 in the first half of this year from 24 in the same period last year, according to Jordan, Edmiston. The value of those deals declined even more precipitously, dropping 85% to $347 million, from $2.3 billion in the first half of 2007.
The number of exhibitions and conferences deals fell to 28 from 38 in the first half of 2007, according to Jordan, Edmiston. The combined deal value dropped 13% to $447 million, from $515 million in the first half of 2007.
The database and information sector gave mixed signals, according to Jordan, Edmiston's figures. The number of transactions increased to 18 in this year's first half, from 14 in the year-earlier period. However, the value of the deals plunged 64% in the same time frame, dropping to $7.3 billion from $20.2 billion. The 2007 tally was skewed by the inclusion of Thomson's $18 billion acquisition of Reuters.
The tight credit market that has restricted media deal-making may only grow worse in the second half of the year. “Today I think the credit market and the economy are impacting all deals, whether they're larger or smaller,” Phillips said.
Some pending deals may provide insight into the current state of the M&A market. For example, private equity firm ABRY Partners has reportedly reached a tentative agreement to sell Cygnus Business Media to Wasserstein & Co., but sources say that deal is fragile and could break apart if acceptable financing is not secured.
Additionally, observers say the economy's skirting with recession has cast a pall on the M&A market. “The economy is impacting transactions in b-to-b,” Phillips said. “People are concerned about will the business they buy perform in the next year.”
Based on where deals were made in the first half of the year, it appears there is more trust in the performance of online and database businesses than in traditional print advertising revenue-based businesses. Jordan, Edmiston's figures, for instance, indicated that deals in online media totaled 146 in the first half of this year, up from 120 in the same period last year. Over the same period, deal value increased 40% to $5.9 billion, from $4.2 billion.
“While the number of completed transactions in the first half of 2008 was up in total, as reported by [Jordan, Edmiston], growth was concentrated in the data information, marketing services and online media sectors,” Marchesano said. “These segments of the media industry are solidly represented by the lower-to-middle market, where deal flow remains solid for high-quality businesses. These sectors also tend to provide strong growth, deliver quality products and services, and offer a solid path to profitability.”
The b-to-b media industry does show signs of weakness. Advertising pages declined 5.3% in the first quarter of 2008 compared with the same period last year, according to Business Information Network figures released by American Business Media. At the same time, b-to-b media's financial performance is no longer based solely on ad pages, which is why ABM also releases data on trade show spending, which was up 1.5% in the first quarter.
Additionally, b-to-b media is not a monolithic industry: While some sectors struggle, others are going gangbusters.
“Fully integrated b-to-b media companies—i.e., those that deliver business information products, along with strong print content, live events and digital products—stand a stronger chance of engaging and locking in their audiences,” Marchesano said. “This, in turn, will help attract and retain marketers and their marketing budgets, which is becoming increasingly important as print revenue declines and migrates to digital, although this migration is still not dollar for dollar, and a gap remains between print and digital yields.”
This year it appears that business media companies with strong business information databases are the only ones likely to go to market and get major deals done. In the first half, Randall-Reilly Publishing, which relies heavily on database products, completed a $180 million deal with Investcorp.
Currently, Reed Elsevier has placed its Reed Business Information unit on the block, and a deal is expected before the end of the year (see story, page 3). Reed Business is a mixture of advertising-supported magazines and information products, such as Reed Construction Data.
Numerous suitors are reportedly bidding on Reed Business. Ironically, McGraw-Hill Cos., which has spent the past three decades shucking off most of its advertising-based businesses for less cyclical subscription-based products, is among the companies said to be interested in Reed Business.
“What's happening is that Reed has a strong business in construction, and it's more of an information business than a print media business,” Phillips said. “McGraw-Hill would be interested in supplementing what they already have [in construction] with what Reed has.”
And if that deal is made, b-to-b media M&A activity will suddenly look a lot more robust. M