Mixed outlook for b-to-b media M&A
Flurry of M&A deals kicks off new year, but low multiples could keep activity in check
By Sean Callahan
The b-to-b media industry greeted the new year with a surprising flurry of M&A activity. Among the deals announced in the first weeks of the year:
This small rush of M&A action follows a dismal 2011 for traditional b-to-b media transactions. Compared with 2010 figures, the number of deals in the sector last year decreased 62%, to 14, and the aggregate deal value plummeted 91%, to $50 million, according to data released by media investment bank Jordan, Edmiston Group.
The exhibitions and conferences category showed more resiliency in the same time frame, as the number of deals increased 39%, to 32, and aggregate deal value increased 249%, to $451 million, according to Jordan, Edmiston. The bellwether deal in this sector was Providence Equity Partners' $180 million acquisition of George Little Management.
Even with the bit of M&A activity in January, most industry observers expect this year to be one of transition for traditional b-to-b media.
“There is pent-up demand on the buyers' side,” said Mike Parker, managing director at AdMedia Partners.
But low EBITDA (earnings before interest, taxes, depreciation and amortization) multiples are offering little encouragement for b-to-b media companies to sell. In a survey of media executives released in January by AdMedia Partners, almost 70% said they expected EBITDA multiples for b-to-b media to be an extremely low 6x or less this year.
Meanwhile, other sectors, especially those in the digital space, are more attractive. For example, 64% of respondents in the social marketing space expect a multiple 7x EBITDA or greater this year.
“I would read that as saying traditional business media companies are going to be very hard to sell,” said Seth Alpert, managing director at AdMedia Partners.
Low EBITDA multiples are especially likely for b-to-b media companies that still rely heavily on print. “For the investment community, print is dead,” said Bill Pollak, the outgoing CEO of ALM, publisher of The American Lawyer. “They say [to b-to-b media publishers], "We need to abandon print faster. Why do we even have print?' ”
Evan Klein, managing director at investment bank Berkery, Noyes & Co., said he doesn't expect an immediate favorable shift in EBITDA multiples for b-to-b media companies hoping to sell. “I don't see the deal flow picking up,” he said. “I was speaking to one b-to-b media owner recently who wanted a 7x-to-8x multiple, but the market is 5x. Right now, unless, it's a distressed asset, the owners aren't selling. Especially when advertising is up, they're not going to sell.”
Michael Wood, former CEO of Hanley Wood, started Redwood Investments in 2005 in part to invest in b-to-b media. So far he has yet to pull the trigger on any deals in the space, primarily because buyer and seller expectations remain far apart.
“We have had engagements with sellers in three or four instances in a fairly serious way,” Wood said. “The seller had in my mind an unrealistic idea of what their company was worth. ... Sometimes you put 20 on the table, and they want 40.”
So what kinds of deals are getting done in the current climate? Some observers say a handful are “capitulations,” where owners are simply giving up on the properties they are selling. One observer placed Future's sales of its music properties to NewBay in that category, because Future is scaling back on its U.S. presence.
“Five years ago, a 4x-to-5x multiple was considered silly,” Parker said. “You wouldn't even consider it. But there's enough change going on in the marketplace that this is going to be the going rate from here into the foreseeable future,” Parker said.
In part because of this low multiple, Parker doesn't foresee a huge uptick in b-to-b media deals this year. “I see it up slightly,” he said, “but I don't think it's a huge movement.”
Nonetheless, in some areas of b-to-b media, deals are getting done at solid multiples because the properties for sale are strong.
Observers say, for instance, Advantage Business Media's acquisition of Vicon was completed at a fair multiple for the buyer and seller.
“We seem to be in a period of transition, where some companies are starting to rapidly make acquisitions,” said Charlie McCurdy, who partnered with Providence Equity in the acquisition last year of George Little Management.
But big questions remain about the long-term prospects of some of the largest companies in b-to-b media, which were acquired by private-equity firms before the recession and underwent financial restructuring after it. The most recent large scale b-to-b media company to restructure was Hanley Wood, publisher of Builder.
Hanley Wood recapitalized and slashed its long-term debt from $410 million to $80 million. The company has a new ownership group that invested $35 million of new capital in it. The group is led by funds managed by Oaktree Capital Management, Strategic Value Partners and Tennenbaum Capital Partners. (A group led by JPMorgan Partners, a private equity affiliate of J.P. Morgan Chase & Co., acquired Hanley Wood in 2005 for $618 million.)
“I think Oaktree, as they are famous for doing, bought a great company at a very low price,” Wood said.
Other companies that have undergone similar restructuring are Advanstar, Cygnus Business Media, Penton Media and Summit Business Media. Together, these companies account for hundreds of b-to-b media brands and perhaps $1 billion in annual revenue.
But even after their restructuring, the exit strategy for these companies remains a mystery. Who has the money—or the stomach—to buy these businesses?
“Private equity is skittish,” said Andrew Goodenough, former CEO of Summit Business Media, which was owned by Wind Point Partners, a private equity fund. “They've been badly burned over the last three years.”
After watching Reed Elsevier unload a portion of its Reed Business Information brands in a difficult sales process two years ago, it is unclear who would be potential buyers for these large media companies.
“The big problem for a private equity buyer in considering doing a deal like that is the exit,” said Ed Fitzelle, managing director at Whitestone Communications. Indeed, even if a private equity company could put together a favorable loan—no easy task in the current environment—to whom would they conceivably sell it next?
But Roland DeSilva, managing partner at DeSilva & Phillips, takes a contrarian view. He believes b-to-b media in general (and these large, restructured companies in particular) are ready for a rebound as they have mastered digital and the other ways to reach their vertical audiences.
DeSilva said Hanley Wood “now has a manageable balance sheet and is in fine shape to take advantage of a slowly recovering housing market.” He said other restructured b-to-b media companies are in similarly strong positions.
“Major sponsors, such as PE firms, are understanding that the attractive part of b-to-b media companies is their ownership of the audience and the content they give that audience,” DeSilva said. “And now that these companies are controlling digital media, they will own the market, and they will be as dynamic as they have been in the past.”
DeSilva predicted the next year or two may be bigger for M&A activity than some anticipate.“A couple of benchmark deals are going to get done,” he said.