Deals will be driven by 'strategic imperatives'

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Richard Mead, a managing director at media investment bank Jordan, Edmiston Group, recently talked with Media Business about economic trends and how they are affecting M&A activity.

Media Business: What's your assessment of last year's b-to-b media M&A activity?

Mead: Until the summer it was an extension of 2006—very active and a lot of deals across the spectrum. The banking crisis in the summer started to slow down transactions, but we really weren't seeing the impact so much on sellers and their business. The impact was more on the financial buyers needing to raise bank debt.

The media sector in total ended 2007 with slightly lower M&A activity in the fourth quarter compared with the fourth quarter of 2006. Nonetheless, our pipeline of quality deals was just as strong at the end of 2007 as it was a year earlier. It's just taking a little longer to close transactions where financing is required. Furthermore, most of the financing issues have been on large-cap deals. The sub-$100 million deals are still being financed, but it is true that the covenant-light borrowing days are over.

MB: What are your expectations for 2008?

Mead: If President Bush and Federal Reserve Chairman Ben Bernanke can actually deliver a workable and effective economic stimulus package and the banks come back to the market, then, based on our pipeline, we're expecting at least as good a year as we had in 2007. But consumers need to get some comfort about where the economy is headed.

With regard to a prospective financial buyer's ability to finance a transaction, the debt sources are important, and private equity firms have been playing an ever-growing role in media and information M&A. For a given valuation involving a quality, must-have acquisition, any shortfall in debt financing will have to be made up by the private equity sponsor.

Nonetheless, it's unlikely that both banks and private equity sponsors will just sit on the sidelines in 2008. And there is just too large a capital overhang among private equity companies—they need to take action.

MB: Do you expect strategic b-to-b media companies to loom larger in this year's deal-making? What types of properties will most likely attract their attention?

Mead: The focus for strategic b-to-b media companies has been consistent for the past two years. From an operational point of view, they are making sure that their b-to-b print businesses are performing as best they can under the circumstances and migrating to online as fast as possible.

However, in the medium term, their acquisition focus is going to be on events businesses, data businesses and online/community assets. B-to-b print magazines have an important role to play in the interaction between buyers and sellers. It's just that they are evolving, and need to evolve, into more of an online delivery.

On virtually every transaction that we're involved with these days, the first thing we ask sellers—because it's the first thing buyers ask—is: What is your online strategy for this business and to what extent have you been able to execute it? There are few, if any, legacy b-to-b media businesses that can get away without an online strategy.

MB: How is the slowdown in the economy affecting M&A activity? Do you see price multiples starting to come down?

Mead: We have already sold two businesses in January with double-digit EBITDA multiples. Quality businesses continue to command strong prices. If you have a quality business that has a strategic fit for a number of buyers, it becomes a "must have" rather than a "nice to have." In such cases, the value is going to be driven by strategic imperatives and not by the banking crisis.

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