Marketers Hit Hard by Credit Crisis

Lack of Funding for New Rollouts, Deal Making and Store Openings

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A correction has been appended to this article.

NEW YORK ( -- With banks in bunker mode and hoarding cash, marketers are beginning to feel the effects of credit drying up. Not only is McDonalds' coffee rollout threatened as franchisees scramble for funding to outfit stores, but General Motor Corp.'s largest dealership folded. Retailers are having a tough time raising money for much-needed holiday pushes and store openings. And deals are being hit hard on both ends of the price spectrum: Questions are being raised whether financing for InBev's $52 billion buyout of Anheuser-Busch will hold up, and $100 million consumer-products marketer Method is said to have taken itself off the market for want of a suitable price.

"There just isn't any credit available," said a direct-marketing executive. "Businesses are being extremely tight on managing their own cash reserves, and they are adopting a lot of controls to ensure their own liquidity."

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The auto world was rocked last week when Bill Heard Enterprises, the nation's 13th-largest auto-dealer chain, according to Automotive News, confirmed it was closing all its dealerships in several states -- and partly blaming the lack of financing. "Rising fuel prices, a product portfolio of mostly heavy trucks and sport utility vehicles, economic recession, unfavorable local market conditions for vehicle sales, the crisis in the banking and financing sectors, and other factors all combined to create a business environment in which the company simply did not have the resources needed to continue to operate," the Columbus, Ga.-chain said in a statement.

Its dissolution takes some $19 million out of media coffers, the amount Heard, which handled advertising in-house, spent in measured media last year, according to TNS Media Intelligence.

Not dealers in debt
Todd Berko, partner in dealer consultant Bel-Air Partners, said even in good times, car dealers generally don't take on a lot of debt. He said the current economic climate will only accelerate dealers' shift to online advertising, which is less expensive and generates better leads than traditional media.

Marc Santucci, president of auto-industry research firm ELM International, predicted auto dealers will order fewer models because they aren't willing to pay the finance costs of carrying the inventory.

Detroit isn't alone in feeling the pain. "Marketers are making contingent plans and are concerned about lines of credit and short-term funds, and that impacts operations," said a public-relations industry executive. "People rely on short-term notes to fund operations, whether its payroll, rent or marketing."

The retail sector is under particular pressure. Regional department stores, including Bon-Ton, Gottschalks and Dillard's, are being closely watched, as are specialty stores such as Talbot's, Pacific Sunwear and Coldwater Creek and discounter Stein Mart, analysts said.

As credit becomes scarce, those retailers will have a difficult time getting much-needed cash for things such as holiday marketing and store openings, analysts said. "They're going to try to do as much [marketing] as they can for this fourth quarter; over 30% of their revenues come from it," said Robin Lewis, VP-head of retail at Vantage Marketplace, a division of Goldman Sachs. "They'll wait to see if they can't get out of [trouble] in the fourth quarter. If not, January and February will be a bloodbath."

Bitter brew
The most profoundly affected so far, however, are deals. Anheuser-Busch's key concern amid the credit crisis is whether the financing behind InBev's pending $52 billion takeover holds up amid the tightening credit markets. InBev's deal promises to pay $70 a share, but the stock ended trading at $66.02 Friday, suggesting investors may have at least some doubts.

But far smaller transactions also are feeling the pinch. A person familiar with private-equity markets for consumer-product companies said deals for companies with sales ranging from $500 million to $2 billion are not getting done because buyout firms just can't get the money they want. Deals that could have gotten credit for up to eight times the acquired companies' earnings a year or two ago can now only attract leverage of two to four times earnings, which limits the buyout firm's ability to make deals.

One recent deal possibly affected by the growing credit crisis was Procter & Gamble Co.'s divestiture of Noxzema, the executive said. The deal appeared to take longer than planned and in the end went to a strategic player, Alberto-Culver Co., rather than a private-equity group, which would have been a more likely buyer a year ago, he said. Another person familiar with the deal said P&G didn't originally want to sell Noxzema to Alberto-Culver, whose recent success with brands such as Tresemme and Nexxus make it more likely to give P&G a harder time in the marketplace.

"We were delighted with the deal we reached for Alberto-Culver," a P&G spokesman said. He declined to comment on other bidder interest in the brand, which P&G sold earlier this month. An Alberto-Culver spokeswoman couldn't immediately reach executives for comment.

Trouble cleaning up
Method Products, the marketer of high-design, natural cleaning products with roughly $100 million in revenue, has been up for sale since early this year, according to people familiar with the matter, who said a more conservative outlook on leverage by private-equity players may be the reason for the privately held, San Francisco-based company not getting the price it wants. But it's not clear the seizing up of credit markets seen in recent weeks is more responsible than the longer-term trend away from highly leveraged deals.

One person familiar with the matter said Method was hoping for "Burt's Bees-type multiples," referring to the heady price of more than five times sales paid by Clorox Co. to acquire that brand about a year ago. Without competition from private-equity players, such a price may be unattainable. Though some potential buyers, such as SC Johnson or Reckitt Benckiser, could do a deal without borrowing at all, they're less likely to pay as much without added competition from private-equity firms.

One executive familiar with private-equity deals in the consumer-products space said while deals are still possible and still being done, expectations and willingness to take on debt have changed. Buyers who would have paid five times sales a year ago might pay only three today, and buyers who might have paid 15 times cash flow before are only now willing to pay 10 times, he said.

A Method spokeswoman said only, "We are not on the market." She did not address whether the brand had been.

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Contributing: Michael Bush, Jean Halliday, Natalie Zmuda, Abbey Klaassen, Jack Neff

This story has been amended to add the comment of a Method spokeswoman, which had been mistakenly cut from the original story due to an editing error.
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