The waiting game: Financial players have earmarked millions for magazine buys, but a timid M&A market has left them fidgeting on the sidelines. Will they start spending in 2002?

Folio: The Magazine for Magazine Management, Jan, 2002 by Joe Hagan

How do you help a bunch of out-of-work magazine executives get their old mojo back? Promise them lots of private equity money to buy magazine companies so they can crown themselves CEO. How do you then frustrate the hell out of them? Just drop them into the current M&A market.

That's the confounding predicament in which a group of about nine former magazine executives--who have an estimated $1 billion in investment capital available to them--find themselves today. Backed by private equity funds enamored of the cashflow and returns on investment that magazine companies can provide, these executives-without-portfolios are looking to snap up platforms (hopefully at firesale prices) on their way to creating brand new media companies. But a strange knot of market forces has prevented them from finding something to run. And when and how the market lets them into the game will determine just how M&A in 2002 will play out.

The sagging economy and the aftershocks of September 11 are prime factors underlying a market stuck in neutral. Buyers and sellers can't agree on whether the market has hit bottom. The former thinks not, finding valuations still too high--a viewpoint the latter, of course, disputes. But there are other factors at work, too. Banks, chastened by previous loans gone bad, have reined in the credit buyers need to leverage deals, even while interest rates flirt with all-time lows.

Needless to say, buyers are discouraged. "For me, it's been extremely frustrating," says Cam Bishop, a former CEO of Primedia's Intertec Publishing who is now backed by Chicago-based Thomas Cressey Equity Partners. "We've looked at a lot of deals. We've made some offers, some have been taken off the market, some have fallen through. It is not uncommon in this business, but it's still frustrating."

But something has to give soon. There's too much fund money out there needing to generate returns for investors, and the continuing downturn will have certain players in pain looking for an exit strategy. But for now, there's no consensus on when and how things will play out. Last year saw deal-flow decrease as the market contracted, according to research by a number of investment banks. Will that continue? It depends on whom you ask. The answers are often directly related to the speaker's position in the M&A food chain.

"People will continue to talk a good game about wanting to do acquisitions, but the execution is going to be very lethargic," predicts Jon Slabaugh, a managing director at MCG Capital, a financial services firm that lends to and invests in media companies. "In the aggregate, there's not enough confidence for this to be a tremendously robust transaction year."

Not so, says Wilma Jordan, CEO of The Jordan Edmiston Group investment bank. "I think you're going to see a very active market in February or March," says Jordan. "I think you're going to see a rush after the turn of the year. We're already getting calls from private equity groups looking for things to buy. I'm very comfortable that we have bottomed."

There is one thing everyone can agree on: There are plenty of qualified CEOs ready to take the helm of a new magazine group; at least eight, according to Folio:'s calculations, including four former ones from Primedia (the owner of this magazine). By one media banker's count, the private equity earmarked for use on behalf of these executives could spur deals worth more than $3 billion. Among the wannabe players: William F. Reilly, former CEO of Primedia, now backed by Texas Pacific Group; Cam Bishop; David Tanzer, former president and CEO of Primedia's consumer group; Daniel McCarthy, former president and CEO of Primedia's enthusiast group, backed by ABRY Partners; Kevin Condon, former senior vice president of the Cahners Travel Group, now backed by Kelso & Company Efrem (Skip) Zimbalist III, former president and CEO of Times Mirror Magazines; John Hartig, former president and CEO of The Parenting Group at Time Inc.; and John Wickersham, former president and CEO of VNU Business Media, now backed by Boston Ve ntures.

The prevailing question for the bunch: Has the magazine market hit bottom? At the height of the bull market, a quality magazine could fetch a multiple of 12 times its 12-month trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Investors, high on dot-corn fumes and the best advertising market in history, gladly forked over the money, leveraging as much as they could with bank debt to reduce risk and to ensure a healthy internal rate of return (IRR) for their funds.

Roland DeSilva, a managing partner at investment bank DeSilva & Phillips, says the multiples for top properties are currently at about nine times a company's cashflow. For him, that's low. "We're at the bottom," says DeSilva, who predicts that all of the indie financial players will have a platform within the year.

Despite that bullishness, quality magazine properties and their backers remain wary. Why? Ask a buyer. "There has been a problem of inflated seller expectations, set in the 1997 to 2000 period, even though the market has come down," says Mark Colodny, a managing director of Warburg Pincus, which is looking to buy. (It has already funded trade show companies like Imark and American Show Management.) "That will slowly change, but it's not going to change immediately."