Edgell: what went wrong?

Folio: The Magazine for Magazine Management, May, 1990 by John Masterton

CLEVELAND-When it rains, it pours. And now that Edgell Communications' sprinkling of financial jitters has turned into a downpour of credit problems, chairman Bob Edgell has stepped down, clearing the way, he says, for a new CEO well versed in the ways of Wall Street."

By all accounts, the 55-title company will need one. Despite what Edgell claims was a record 1989, the company appears to be sagging under the heavy debt incurred when Bob Edgell led a $334 million leveraged buy out of Harcourt Brace Jovanovich in 1987. Edgell Communications is still carrying $100 million in high-yield junk bond debt, pays $2.2 million per month in debt service and will shoulder an additional $13 million in debt service in fiscal 1991, according to terms of its existing notes.

In light of all that, Standard & Poor's has lowered the company's subordinated debenture rating to CCC, from B-. Even worse, S&P ratings officer Jeff Evans hints that the publisher's "strained financial condition" makes a further downgrade possible--an action that could be tantamount to default in a market already skittish on high-risk bonds.

"Basically, Edgell owes more than the book value of the company," explains Evans. "The business is fundamentally sound, but it's carrying an enormous debt load."

In the face of that, Bob Edgell maintains that it's "business as usual" and that the ratings agency is overreacting. "S&P is getting conservative because of problems with high-risk, high-yield bonds in general," he argues. "They downgraded scores of bonds, not just ours. The fact is, we're meeting every financial obligation."

And the downgrade will have only a minor effect on future Edgell Communications financing, claims Arland Hirman, vice president,/treasurer and secretary. "We'll look primarily to existing lenders for any future financing"-namely, General Electric Capital Corporation, its senior lender; and Kidder, Peabody, which issued the original high-yield bond. Both are units of General Electric Company. "Their interests lie in the continued successful operation of the company," Hirman says.

On the plus side of the ledger, Edgell claims record revenues for 1989. The company grossed $205 million from all operations-publishing, trade shows and school products. But total publishing revenues of $120 million were down $4 million from the previous year, and total ad pages fell 3.6 percent, says Hirman. According to Business Development Group, the 25 core Edgell titles, in 16 categories, were down 6.2 percent in pages, and up 4.9 percent in ad revenue.

"Our ad pages dipped last year, just like everyone else's in magazine publishing," Bob Edgell explains. Is a sale inevitable?

Although Edgell insists there are no plans to sell or fold any titles--there are rumors that two offers to buy the company were turned down industry observers believe otherwise.

Selling is "a forgone conclusion" now that the company is in the hands of its investors, says Arthur Rosenfield, president of the Business Development Group. "It's just a matter of who and when. "

He asserts that Kidder, Peabody "is not a publishing company. They're probably going to find a way to exit the situation gracefully, whether they sell the company in part or together or in pieces."

"I don't think Edgell can borrow its way out of trouble now," concurs S&P's Evans. "Besides, refinancing usually means making concessions. Selling off some assets might be its best alternative at this point."

A Kidder spokesperson, however, denied Kidder has plans to sell its remaining position in Edgell. "We don't intend to do anything of the kind," says the spokesperson, who did not want to be named. He adds that Edgell enjoyed record cash flow and operating capital last year.

Bob Edgell's publishing strategy, which worked well in a thriving business publishing market, no longer fits the times, according to Rosenfield. "Edgell's strategy was to publish small books without any attempt to create a leadership position. He was willing to accept being number three or number four in a field. In today's market, there are very sophisticated, high quality operations, like Cahners and CMP, and what [Edgell] had was not a commercially viable strategy." What's more, he says, many of Edgell Communications' titles are currently in soft markets, like food service, corporate travel and hotel management.

Further, he says, in hindsight, Bob Edgell's buy out timing was poor. "He bought one of the largest publishing companies at a time when price multiples were at their highest. To be profitable and successful under normal circumstances is difficult. But Edgell can't be successful and profitable under the realities of an LBO because of the cost of money. He had no cash to invest in product, marketing and people, and, because of this, sooner or later the competition was going to win."

One thing is clear: Edgell Communications' new CEO will have some work to do. "Obviously, we carry a significant amount of debt," Hirman acknowledges. "It's important that our new CEO know how to work well with financial markets. "