M&A recovery a work in progress

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Although mergers and acquisitions activity in the b-to-b media sector picked up last year after a dismal 2009, it wasn't exactly a bull market.

Reed Elsevier unloaded its stable of print brands last year without even bothering to bring many of them to market. Nielsen Co. also sold off or closed its print titles last year, and the market appeared to applaud that move as the company raised $1.56 billion in an initial public offering last month.

But despite the negative outlook on b-to-b media registered by these two business information behemoths, prominent buyers are poised to return to the market. Case in point: Michael Wood, co-founder of construction industry media company Hanley Wood. Wood left the company after its more than $600 million sale in 2005. With his son, Michael Wood Jr., he has formed Redwood Investments, which plans to invest in media. “I'm sort of a contrarian, I guess,” the elder Wood said.

The pounding b-to-b media took in the recession has not dissuaded Wood from looking at potential investments in the sector. In fact, he said that investing in Builder during the downturn of 1991 allowed the magazine to catapult itself past its competitors when the economy came roaring back.

“You read and hear everybody talking about the death knell of b-to-b media,” Wood said. “I don't think that's the case. I've lived through four of these recessions. People always say that kind of stuff.”

Wood identified four areas of potential investment: subscription data businesses, media covering green energy, association-run trade shows and solid print properties owned by companies with balance sheet issues. “If we would have had this [company] organized six to 12 months ago, we would have been a bidder for Nation's Restaurant News,” he said. “It's a solid magazine.”

The figures from various reports analyzing last year's media M&A activity show some mixed support of Wood's optimism. The sector has seen growth in the number of deals, although those being completed tend to be on the small side.

In January, for instance, Berkery, Noyes & Co. reported the number of media and information deals increased to 687 last year, a 27% bounce from 2009. The value of those deals totaled $24.0 billion, a 35% plunge from the previous year, which saw several huge deals, such as Thomson Corp.'s $17.58 billion acquisition of Reuters Group.

Jordan, Edmiston Group delved specifically into the b-to-b media sector in its report. The number of b-to-b online media and technology deals totaled 59 last year, an increase of 11% over 2009. Deal value in that sector jumped 88%, to $2.5 billion.

The exhibitions and conferences deal market, however, was cool last year, with the number of transactions dropping 34%, to 23, and the value of those deals falling 22%, to $129 million.

The number of traditional b-to-b media deals increased to 37 last year, up 85%, according to Jordan, Edmiston. However, the aggregate deal value plummeted to $534 million, a drop of 85%. Much of that value came from a single deal: United Business Media's acquisition of Canon Communications for a reported $287 million.

Additionally, the number of M&A deals in the entertainment and media sector increased to 804 last year, a gain of 3% over 2009, according to PricewaterhouseCoopers. The aggregate deal value dropped to $33.5 billion last year, a decline of 10%. PwC said, however, that it believes corporate cash reserves will contribute to a growing M&A market in the media and entertainment sector this year.

PwC also sounded a note of caution, pointing out that a “maturing wall” of debt in 2013-15—when more than $145 billion of entertainment and media industry debt will come due—may affect future M&A activity.

In the b-to-b media sector, companies such as Advanstar Communications, ALM Media, Cygnus Business Media, Penton Media, Questex Media and, most recently, Summit Business Media have taken steps to restructure their long-term debt in the past two years. At the same time, these companies still hold long-term debt that will be due in the next several years.

It's unclear how the private equity companies and lenders owning these businesses will handle their debt issues and how that will impact potential divestment. Scott Peters, co-president of Jordan, Edmiston Group, said he expects many companies holding broad portfolios in a variety of vertical industries to be broken up over the next several years as their owners—private equity funds or lenders—look to sell.

“We are going to enter of period in b-to-b where there's going to be a "deconsolidation,' ” Peters said. “The trend longer term is to be very deep vertically, to have a brand have capability across all forms of media and technology that serve the audience appropriately. So as to the concept of having 15 or 20 vertical markets under one roof, I think people are shifting their thinking. That's probably not long-term the right model.

“The right model is having one, two or three verticals that are closely aligned and being absolutely deep vertically within that. If you believe that, and I think evidence would prove that's probably the right model, we're going to see a period where there will be spin-outs and buy-outs of individual brands or individual groups within portfolio companies where people are putting together assets within a market to create that vertical dominance. I think that will characterize b-to-b M&A over the coming five years.”

Evidence of a media and marketing services company divesting noncore assets can be seen in Watt Publishing Co.'s recent sale of CabinetMaker/FDM Woodworking to CCI Media. Watt, which primarily focuses on the agricultural sector, had acquired the woodworking unit in 2003 in an attempt to diversify.

In the early part of this year, there have been large deals peripherally connected to traditional b-to-b media—the Nielsen IPO, Demand Media's IPO and the planned $175 million IPO of LinkedIn. But the deals executed in traditional b-to-b media continue to be at the small end of the spectrum.

For instance, NewBay Media announced this month that it has acquired Electronic Musician, Mix, Radio, Sound & Video Contractor and from Penton Media.

Penton has been on both sides of the M&A market in recent months, acquiring Nation's Restaurant News from Lebhar-Friedman Inc. in December and divesting Cement Americas, Concrete Products and Rock Products to Mining Media International in November.

Berkery, Noyes participated in two b-to-b media deals in January. It represented LRP Publications, which publishes Human Resource Executive and Risk & Insurance, in the sale of its public employment group and bankruptcy/banking products group to Thomson Reuters. It also represented Neil Rouda in the sale of his stake in MedTech Media, a company he founded in 2003, to the Healthcare Information Management System Society.

“We're seeing a lot of strategic deals in the small-to-midsize range,” said Kathleen Thomas, a Berkery, Noyes managing director. “The appetite is coming back slowly but surely.”

The one beacon of hope for large-scale b-to-b media deals in the past year was UBM's Canon acquisition. While his compatriots at Reed Elsevier and Nielsen have largely shed their b-to-b brands, UBM CEO David Levin has been a contrarian, making about 90 deals for a variety of b-to-b media properties over the past five years.

Under Levin's direction, UBM has focused its acquisitions on subscription data products and trade shows, businesses that don't rely solely on sometimes fickle marketing dollars. The company has also focused its acquisitions on emerging markets.

Canon, said Charles McCurdy, the company's former CEO who bought the business in 2005 with the backing of Spectrum Equity Investors, built itself by focusing on high-end manufacturing. Its particular specialization is medical devices, a market that remained strong through the downturn. The company also focused on trade shows, which derive revenue from both end-users and marketers, and boosted its digital and international operations.

The result was a rarity in b-to-b rollups created in the past decade: a healthy company without balance sheet issues. When McCurdy was asked if he could create a similar success again, he replied, “That's what I'm trying to figure out right now.”

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