Yet, argues Ziff Davis' chief operating officer and chief financial officer, Bart Catalane, that deal beats the bond-market valuation of 20 cents to 22 cents.
"In the short-term, the bondholders have taken quite a haircut," said Jason Klein, former CEO of Times Mirror magazines who's now trolling for magazine acquisitions with private-equity backing.
The deal would give bondholders a total of $30 million in cash, $95 million in new senior subordinated notes, and stock. As part of the deal, Willis Stein would inject $80 million cash into the company, for which it would receive a new preferred stock and warrants for common stock. Mr. Catalane conceded the deal would dilute Willis Stein's stake but said the dilution was "minimal."
The stock portion of the deal, Mr. Catalane said, means that bondholders could ultimately "go well above par." The bond deal would shave $30 million a year from Ziff's debt and interest obligations, he said.
The agreement was made public last week in a 10-K filing studded with stark assessments of the company, even by the standards of its declining fortunes and prior filings.
At year-end, reads a section penned by auditors PricewaterhouseCoopers, "the company incurred a significant loss from operations, has negative cash flows from operations and negative equity, and has defaulted on its senior credit facility, which raises substantial doubt about its ability to continue as a going concern."
Elsewhere, the company reports "if we are not successful in effecting a restructuring of our capital structure, it is likely we will be forced to seek bankruptcy protection."
For the nine months ending Dec. 31, the company posted a net loss, of $415.7 million -including a $240.1 million writedown and a $37.4 million restructuring charge-on revenue that fell 36.4%to $224.6 million, and negative earnings before interest, taxes, depreciation and amortization of $39.7 million.
Outside the company, executives and financial players suggest the deal amounts to a sort of prepackaged bankruptcy. Mr. Catalane said the deal would not need a trip to the courthouse if the required 95% of bondholders sign onto the deal.
"We think we'll be successful out of court," Mr. Catalane said. But, he added, "we don't think the in-court alternative is that controversial." About 60% of the bondholders have agreed to the deal, he said.
In a statement provided to Advertising Age, Chairman-CEO Bob Callahan waxed triumphant, if somewhat prematurely: "We won this battle and we're going to win the war."
"They're running a marathon and the finish line is in sight, but everyone's got to agree," said one executive, while warning staying afloat requires the company meeting its banks' financial targets. And, the executive added, "there's nothing to indicate that a turnaround is coming anytime soon."
Mr. Catalane did not disagree. "The entire consumer and [business-to-business] sector continue to see malaise and we don't see that changing in the next quarter," he said.
To roughly quantify what's become of Willis Stein's initial investment, Ziff Davis' last full fiscal year, which ended March 31, 2001, showed EBITDA of $48 million. A typical multiple for b-to-b deals, according to one executive's calculations, would result in a deal valuation of around $384 million. Since then, all company indicators have substantially deteriorated.
Willis Stein paid $780 million for Ziff Davis in 2000, and has since added over $100 million in cash to keep Ziff afloat.