Endgame approaching for Ziff Davis Media?

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At American Business Media's Spring Meeting last month in Naples, Fla., there was buzz about Ziff Davis Media's future.

The tech media company last July hired Lehman Brothers to explore strategic options, including a possible sale of the company as a whole or in groups.

Ziff's three groups are the Consumer/Small Business Group, which includes PC Magazine; the Enterprise division, which includes Baseline, eWeek and CIO Insight, as well as the Web Buyer's Guides; and the Game Group.

Rumors swirled late last year that private equity firm Quadrangle Group was acquiring the Enterprise division, but no sale occured.

Private equity firm Willis Stein & Partners, which bought the magazine assets of Ziff Davis for $780 million in cash in 1999, will take a "major bath" on a sale, said a b-to-b media analyst who requested anonymity.

Ziff's woes have been partly attributed to the fact that its previous owner, Japanese conglomerate Softbank, in 2000 sold ZDNet to CNET for $1.6 billion. Without ZDNet, Ziff essentially had to start from scratch online.

"It's not as if [Ziff] hasn't gotten bids, but word on the street is that they aren't worth nearly $400 million, and by default it'll need to restructure the debt or seek bankruptcy protection," the analyst added. [Ziff's debt is roughly $400 million, up from $357 million at the end of 2005.] "It all depends on whether EBITDA growth can cover its cash needs," the analyst said.

Ziff's first-quarter consolidated EBITDA increased 15% to $3.1 million, from $2.7 million in the year-earlier period.

Ziff CEO Bob Callahan, who took charge in 2002, pointed out that the company's EBITDA earnings have increased every year since 2002, with the exception of 2005 when it hired 205 people to ramp up its digital offerings.

"Five-and-a-half years ago I inherited a strong company in terms of brand awareness and talent. And Ziff has a strong and loyal customer base," Callahan said in an interview with Media Business. "The hard part is that I also inherited a substantial amount of debt amid print erosion that's been particularly pronounced in the IT space."

Callahan said he could not comment on a potential sale of Ziff Davis.

Tom Kemp, a managing director at private equity firm Veronis Suhler Stevenson and former CEO of Penton Media, said Callahan's situation is not unlike the one he faced earlier this decade when Penton nearly folded. The difference, Kemp said, is that "Penton had a broad array of markets [in its portfolio] whereas Bob is dealing with one broad market" in which print products continue to get hammered.

Ziff's overall revenue for the first quarter totaled $32.7 million, down from $40.3 million in the year-earlier period. Excluding revenue from closed publications (Extreme Tech, GMR, Official U.S. PlayStation, Sync and XBOX Nation), revenue fell $4.3 million. Online revenue was up 30% in the first quarter.

Despite a 15% drop in print revenue, Callahan said, he has no plans to divest any of Ziff's print products.

At the end of 2006, Ziff had $15.4 million in cash. The company borrowed an additional $20 million in February. As of March 31, Ziff had $22.2 million in cash, meaning the company burned through more than $13 million in the first quarter.

"[Ziff] needs to greatly increase its EBITDA to reduce the cash burn rate of the business in order to service its debt," said the analyst who asked not to be named, adding that it's highly unlikely that Ziff will resemble its current incarnation by the end of the year. Still, the analyst said, "Ziff Davis brands will go on. Ziff is a real business with real revenues."

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