The recent sale of Hanley Wood to JPMorgan Partners for $650 million is just the high point of a very active business media M&A market that has seen a number of $100 million-plus deals, including:
The sale of Thomson Media to Investcorp for $350 million.
The sale of Canon Communications to Apprise Media for $210 million.
The sale of selected groups of assets by Advanstar Communications to management (Questex Media Group) for $185 million.
The sale of Medical World Communications to Ascend Media for $130 million.
The pending sale of Primedia Business.
While deal size is up significantly in 2005 versus 2004, deal activity has increased at a more modest rate across the media and information M&A market. As reported in the Jordan, Edmiston Group's (JEGI) April 2005 "Client Briefing" newsletter, there were 140 media and information M&A transactions in the first quarter of 2005 versus 109 transactions in the first quarter of 2004, representing an increase of 28.4%. However, over the same period, transaction value more than doubled, increasing from $4.2 billion in the first quarter of 2004 to nearly $10 billion in the first quarter of 2005.
The following provides five key drivers behind the spirited auctions and high valuations over the past six months to a year:
The larger the company, the higher the multiple
According to the JEGI Transaction Database, across the media and information industries, the larger the company, the higher the multiple paid for the property. Generally, EBITDA (earnings before interest, taxes, depreciation and amortization) multiples reach the low double digits (10x to 12x) on properties with $100 million-plus in revenue, with select transactions attracting 15x EBITDA and higher. Properties with less than $50 million in revenue typically attract EBITDA multiples in the high single digits (7x to 9x). With a greater number of large properties coming to market, transaction valuations have recently increased overall.
Few platforms of size to acquire
The b-to-b media industry is very fragmented. For example, there are more than 5,000 business publications, and 44% of those are owned by small to medium-size businesses (most with less than $10 million in annual revenue). So, when larger media properties come to market, there is heavy demand both from large strategics and private equity firms that look primarily for platform acquisitions or sizable add-ons.
Strong competition among banks to finance acquisitions
Bankers are under mandates to put capital to work, so there is strong competition among lenders to finance acquisitions, especially the $100 million-plus deals, which enable banks to invest a larger amount of money in a single transaction. This has resulted in a dramatic increase in lending multiples, which have risen to as high as 6.5x to 7x trailing 12 months' cash flow. As a result, buyers have been able to raise their offers on acquisitions, leading to increases in transaction multiples and values.
Additional sources of financing
Additional sources of financing, primarily specialty mezzanine lenders and hedge funds, are playing a more important role in the debt component of acquisition financing by providing loans that bridge the gap between a company's senior debt and equity positions. Sometimes called subordinated debt, this "middle" debt layer maximizes leverage in a capital structure, providing acquirers with the flexibility to offer higher multiples on their acquisitions.
Interest rates still historically low
Although interest rates have been steadily rising over the past year, they are still historically low. As a result, investors are able to rationalize paying more for an acquisition, since they can maintain relatively low interest payments on larger debt facilities. This increases offers on acquisitions, driving up valuations.
Wilma Jordan is the founder and CEO of the Jordan, Edmiston Group. She can be reached at [email protected]