The New Face Of Money

Folio: The Magazine for Magazine Management, June 15, 2001 by Sarah Fetherston, Joe Hagan

CASH-RICH AND CREATIVE, THESE NEWCOMERS TO THE MAGAZINE INDUSTRY ARE SHAKING UP THE M&A STATUS QUO. HERE'S A LOOK AT THE PRIVATE EQUITY FIRMS THAT ARE PUBLISHING'S NEW POWER BANKERS.

ABRY PARTNERS

The joys of magazine investing have only recently been discovered by ABRY Partners. That it took so long is a lapse for which Peggy Koenig, a partner at the 13-year-old, $1.6 billion private equity firm, makes no excuse. "Shame on us," she says.

ABRY, however, is rapidly making up for lost opportunities. Last June, the Boston-based firm, which has invested more than $800 million in media and communications companies such as Avalon Cable Television, Citadel Communications and Muzak, branched into b-to-b publishing when it spent $275 million to acquire Cygnus Business Media. This past April, it bought Black's Guides for $21 million as a prelude to a roll-up in the commercial real estate field. And it has now earmarked more than $100 million of its newest fund (which weighs in at $775 million) for a new publishing-focused venture platform

called Gallarus Media.

Hired to oversee the fledgling company is Dan McCarthy, CEO and president of now-defunct dot-com Themestream, and former CEO and president of Primedia's Enthusiast Group.

"It's not that something changed in the sector to make it suddenly appealing," Koenig says. "It just seemed a logical focus as we have continued to invest in radio and TV and cable, because this area has similar characteristics."

Koenig, who is the lead partner on this sector of investment at ABRY, has come to appreciate some of the magazine world's attractive attributes: a large and stable revenue pool; the ability to generate a high amount of free cashflow, which can bolster the ability to buy add-ons and quickly consolidate; and high barriers to entry, making it difficult for competitors to enter the arena.

So far, ABRY has stayed away from investing in consumer magazines, finding the vagaries of the newsstand and subscriptions a bit off-putting. But that may change with the creation of Gallarus and the hiring of McCarthy.

"In terms of the kinds of opportunities we're looking at together, it's not just business publishing companies," says McCarthy. "We're interested in content information created by the enterprise--that can be a directory company, a media company, a targeted consumer magazine." On the b-to-b front, ABRY and McCarthy like companies with diversified revenue streams and paid subscriptions, as well as platforms that are substantial in size.

There's no rush to make these deals, however. "ABRY is patient about finding the right deal, not just a deal," says McCarthy.

Reed Phillips, a managing partner at DeSilva & Phillips (the media investment bank that handled the Black's and Cygnus acquisitions) seconded that notion: "They never enter into a deal that they don't end up closing. They live by their words. If they say they are going to do the deal, they do it."

And when it comes to getting its money out, ABRY (named after the initials of its two founders, Andrew Banks and Royce Yudkoff) usually goes for a sale. "An IPO is also a possibility, but we view that as more of a financing exercise than an exit strategy," Koenig says. The firm's funds are all 10-year funds, and they look for a three- to seven-year exit. "We like to hold investments and target operational improvements that take time to unfold. We never forecast that the exit multiple will exceed the original multiple."

Sarah Fetherston

* FUND CAPITALIZATION

$1.6 billion in three funds; most recent fund closed in January 2001 with $775 million

* INVESTMENTS

Cygnus Business Media, Black's Guides, Avalon Cable Television and Muzak

* PHILOSOPHY

Invests solely in media and communications companies; when it comes to magazines, prefers b-to-b

WARBURG PINCUS

Mention consumer magazines to Mark Colodny, and he'll gladly explain why investors should treat them as they would the suspicious-looking contents of that Tupperware container lurking in the back of the fridge. The newly ensconced Warburg Pincus vice president, charged with helping spend the $5 billion in the firm's global fund, ticks off the usual suspects--poor circulation economics for both the newsstand and subscriptions, a weak ad market, and a high failure rate for new titles that is bound to get worse--as he makes the point that the conditions that made purchasing consumer magazines attractive five years ago have disappeared. "Growth is likely limited for the near future, and valuations don't yet reflect this," he asserts. Moreover, the consolidation that's taken place over the last few years means that there just aren't that many properties to look at.

He would know. The former M&A guru at Primedia oversaw between 70 and 80 deals during his six years at the company. So just what are the folks over at the private equity and venture capital firm of Warburg Pincus interested in, publishing-wise? B-to-b platforms. Meaning, as Colodny defines it, "A company with a deep management team and significant operating structure--a back office--and a meaningful product line that has category dominance."