Publishers' debt worries media buyers

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The severity of the current media recession has left many b-to-b media companies scrambling for cash to pay the long-term debt they piled up in the go-go days of the Internet bubble.

"Debt is a four-letter word," said Robert Crosland, managing director of AdMedia Partners Inc., a New York-based investment bank.

To boost cash flow to service their debt, Penton Media Inc., Primedia Inc., Ziff Davis Media Inc. and others have slashed staff and budgets in circulation, sales and editorial departments. The moves have left some advertising professionals concerned that their marketing vehicles have been diminished.

"Making cuts will affect quality of the product," said Caroline Riby, VP at Saatchi & Saatchi Rowland, Rochester, N.Y. "You may not see it right away, but you will see it sooner or later."

Signs of the difficulties facing media companies are in the headlines. In January, Ziff Davis Media, lacking the cash to meet a $15 million bond interest payment, scrambled to renegotiate with its bond holders, banks and main backer, Willis Stein & Partners III L.P.

Also last month, Primedia, the parent company of b-to-b publisher Intertec, sold Modern Bride, which many considered a core property.

And this month, Penton Media, which owns Internet World, continues to renegotiate its long-term debt responsibilities with its banks.

All of these events reflect the cash crunch—caused by the fierce media recession and exacerbated by the advertising paralysis that followed Sept. 11—that is confronting the b-to-b media world.

"This is the worst media recession most of your readers have ever seen," said Robert L. Krakoff, chairman-CEO of Advanstar Communications Inc. "It’s much worse than ’91."

B-to-b ad pages declined nearly 20% in the first three quarters of 2001 compared with the same period in 2000, according to Business Information Network figures compiled by Competitive Media Reporting for American Business Media. The decline in technology pages has been even more precipitous.

As ad revenue evaporated, media companies saw their earnings – before interest, taxes, depreciation and amortization – shrivel. With the decline in EBITDA, many media companies have struggled to make loan payments.

"When a company’s cash flow goes down, the ratio of leverage goes up," Crosland said. "It’s not that the debt has changed; the ability to service the debt has changed."

Some companies have found themselves in violation of loan covenants that require a specified leverage ratio between EBITDA and long-term debt. "A [leverage] ratio of more than five times cash flow is really putting stress on a company," Crosland said. "It’s about all a healthy company can tolerate."

Reducing debt

To extricate themselves from debilitating debt and boost cash flow, companies can employ several strategies. They can cut costs, sell properties, restructure debt or simply choose to ride out the downturn until the inevitable upswing appears.

In its 10-Q Securities and Exchange Commission filing for the third quarter of 2001, Advanstar Communications reported long-term debt of $558 million. Its EBITDA was projected to be slightly in excess of $100 million for the full year.

Despite a decline of 6% in EBITDA in 2001 compared with 2000, Advanstar was still within the parameters of its loan agreements. "At the end of the fourth quarter we were in compliance," Krakoff said.

To boost its cash flow, Advanstar has cut jobs, limited travel and taken other steps to trim costs by $20 million annually.

The company has tried to be careful where it has cut expenses. "The last thing you want to do is damage a market-leading product," Krakoff said. "If you have to get dollars, people focus on things that are not stars."

CNET Networks Inc. reported a $2 billion loss in 2001. It also reported negative EBITDA of $46.1 million. The company had long-term debt of $176.8 million at the end of the third quarter of 2001, according to its latest 10-Q filing. Its cash of $233 million puts it in a position to pay off its debt, said Robert Borchert, VP-investor relations. CNET is expecting a poor 2002 in the tech sector, which may impair its position.

Another down year in the tech sector won’t be good news for Penton, either. The company saw its EBITDA cut nearly in half for the first nine months of 2001 compared with the same period the previous year. Over the same period, its long-term debt grew to $372.6 million from $314.6 million.

As it renegotiates its loan agreements, Penton has closed 15 offices worldwide and cut 250 positions.

"Penton is not in that bad a shape," AdMedia’s Crosland said. "They’re not in good shape, but they’re not at the point where they’re operationally impaired. But they can’t go out and buy stuff. They’re using all their money to service the debt. They’re hamstrung."

After acquiring and EMap USA in 2001, Primedia’s debt increased from $1.5 billion to $2 billion between December 2000 and September 2001. At the same time, its EBITDA declined. For the first three quarters of 2001, EBITDA was $113.8 million, compared with $172.3 million in the same period the previous year.

To boost cash flow, Primedia is selling properties. The company talked tough in a recent press release, announcing that properties "not turned profitable in the next few months will be shut down or sold to immediately eliminate the cash drain."

Additionally, the Primedia Business Magazine and Media Group, which publishes Telephony, underwent a 20% staff reduction. Hiring is frozen, and expenses, including travel, were reduced by 50%.

Ad page declines

Ziff Davis is dealing with ad page reductions approaching 50%. Its revenue for the first half of fiscal 2001 tumbled to $150.7 million, from $227.4 million in the first half of fiscal 2000. Its debt on Sept. 30, 2001, stood at more than $430 million. By January, Ziff Davis was struggling to make a critical interest payment of $15 million. It will face another payment on July 15, while cash flow continues to dwindle.

Bart Catalane, COO-CFO of Ziff Davis, said the company will survive. "We have no intention of selling any assets," he said. "PC Magazine is beachfront property."

He remains confident that the tech sector will make a comeback. "The demise of the tech sector is over-reported and overdone," he said.

The trouble facing heavily leveraged b-to-b media companies is clear. What’s unclear is the effect that efforts to boost cash flow will have on their products as marketing vehicles.

Roland DeSilva, managing partner of DeSilva & Phillips Inc., a New York media investment bank, scoffed at the notion that media properties were being damaged by cost cutting. "I don’t think it means anything," he said. "The editorial product is still being delivered, and the shows are still being delivered. They’re still excellent environments for their advertisers."

Some in the advertising business disagree. They are concerned about the effects of media company cost cutting on the ability to reach customers with marketing messages.

Saatchi & Saatchi Rowland’s Riby has already noticed cutbacks in research by trade publishers. She’s also concerned about the effects of budget cuts on circulation departments.

So is Sheree Johnson, senior VP-director of marketing services at NKH&W, Kansas City, Mo. "I think you’ll probably start seeing some effect with the June BPA [circulation audit] statements," she said.

Johnson also noted a service decline from publishers. "I’ve noticed we have had some of our sales reps laid off," she said. "They’ve redeployed people’s territories. They’re not making as many sales trips or sales calls. They’re doing a lot via e-mail or over the phone."

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