Investors like what they see on trade side

Folio: The Magazine for Magazine Management, March 15, 1995 by Tim Bogardus

Despite rumblings of a tax on advertising (not likely) and yet another interest-rate hike the seventh since early 1994), buyers and sellers of business-to-business publications remain confident that 1995 is the year of the deal.

"Investors believe that specialized business magazines and trade journals are excellent investments once again, and the prices paid reflect this judgment," says Paul McPherson, managing director at AdMedia Corporate Advisors, a New York City-based publishing consultant and investment banking firm. McPherson notes that buyers are paying multiples averaging in excess of eight-times cashflow-up from the range of four- to six-times cashflow during the early 1990s: "Until recently, operating margins were as low as 10 to 12 percent, but in many cases they have climbed as high as 15 to 17 percent or greater."

McPherson and John Emery, a senior adviser at AdMedia, attribute part of the turnaround to the involvement of players outside the business. "Non-publishing investors generally ascribe a higher value to such publications than do the usual industry players, probably because most publishers are still leery of the early 1990s slump," Emery says. A host of recent deals support his assertion.

Outsiders buy in

Non-publishing investors were involved in at least five of the major deals conducted during the past year and a half, including New York City-based K-III Communications'$60 million purchase of Maclean Hunter's two major U.S. divisions in january (see related story, Page 64). The investment firm Kohlberg Kravis Roberts & Co. owns 88 percent of K-III, which also plunked down about $50 million for Peoria, Illinois-based PJS Publications in December and then a reported $50 million more a month later for McMullen & Yee Publishing in Placentia, California.

In the largest acquisition in recent years, Forstmann Little & Co., a New York City-based investment outfit with no prior media holdings, bought Ziff-Davis Publishing for $1.4 billion--citing Ziff's market-leading position and strong management as attractive inducements.

Other trade-magazine companies with ties to venture capitalists include Melville, New York-based PTN Publishing Company (Chicago-based investment bank Golder, Thoma, Cressey, Rauner, Inc., pumped in $20 million in 1992); Fort Washington, Pennsylvania-based Cardinal Business Media (backed by Los Angeles-based venture capital firm Brentwood Associates); and Cleveland-based Advanstar Communications New York city-based Goldman, Sachs & Co. owns 49 percent).

Business publishers will soon find even more available capital when VS&A Communications Partners' new Fund II, a private equity fund, reaches fruition. An affiliate of Veronis Suhler & Associates in New York City, VS&A Partners was formed in 1987 to participate as a principal investor in communications industry transactions; its Fund I is invested in eight companies with aggregate revenues of more than $170 million.

VS&A president Jeffrey Stevenson says Fund II, which now totals about $112 million, will eventually reach $250 million. Some is slated for buying or investing in consumer and trade titles, along with broadcast, cable, book publishing and information-service companies. "We see ourselves as an equity pool available to small, successful, growth-oriented publishers that want to build their businesses," he explains. "We try to add value to the companies we invest in by providing strategic direction and cashflow.

The climate is right

Given trade publishing's newly regained respect in the financial community, the climate for selling or attracting equity investment has seldom looked better. And a long-debated capital-gains tax cut, which analysts say would free up more money, might sweeten acquisition prospects and energize the market further.

Even without the tax cut, insiders say the pace of deal-making will continue to be brisk. "People will not wait for a change in the capital-gains tax," Emery predicts. Stevenson agrees: "The market has come back."