For publishers, easy access to bank loans is history

Folio: The Magazine for Magazine Management, August 1, 1992 by Susan Hovey

Record-breaking ad pages of the gogo eighties aren't the only publishing phenomena that seem to have vanished with the decade. Gone too is the willingness of lending institutions to provide funds for wouldbe magazine buyers who lack a history of strong cashflow.

Not only are banks shying away from providing capital for equity deals, they're also pulling the purse strings shut at requests for straight loans. "What's happened is that banks have dried up their funding to magazine publishers who do not have a well-established operating record," says one publisher.

For the small company, finding a private equity source or venture-capital money for an equity investment is extremely difficult, if not altogether impossible," adds Jim Rutherfurd, a director in the media group at First Boston Corp., a New York-based investment bank.

Aside from the recession, Rutherfurd cites regulatory changes in both the banking and insurance industries that penalize institutions for lending money to companies that fail to meet certain credit guidelines - in other words, those who need it most, but who are high risk. What's more, mergers between large banks such as Chemical and Manufacturer's Hanover Trust mean the remaining players be more choosy in pursuing deals. Rutherfurd also blames high default rates in the broadcasting industry with cooling investors' interest in media properties in general.

"The whole valuation of individual titles and companies has changed," notes Tim Mclnerney, senior associate for McNamee Consulting. "We went through a period in the mid-eighties when company stock prices were commanding sale levels as high as 18 to 22 times earnings. Now that's shrunk to six or seven, and we're not likely to see ratios that high again."

Perhaps the two best examples of how deal structures have been changed are the $650 million acquisition of CBS Magazines by Peter Diamandis in 1987 and last summer's $675 million purchase of eight Rupert Murdoch-owned titles by K-III Magazines. The first deal, Rutherfurd points out, was virtually all debt financed, while the second included about 35 percent equity ($175 million in common stock, or pure equity, and another $75 million in preferred stock).

"At the height of the lever-aged buyout days, the typical deal structure would allow for debt-to-equity ratios of 90 to 10 - and occasionally as high as 95 to 5," Rutherfurd says. "Today, the typical structure is more likely to be 50/50 [as companies must relinquish a greater stake], while an aggressive deal, as with K-III, might be 65/35 [debt to equity]."

If that seems contradictory to the trend away from equity deals, Rutherfurd explains that it's only because K-III was able to put up its own equity. He adds: "The people making acquisitions today don't need a lot of financing. K-III has access to a lot of money and can spread the risks around. The Peter Diamandis stuff doesn't happen anymore."

But could that change? While some observers expect the lending clamp-down to ease up in the next few years, most see the trend as a reflection of fundamental changes in the magazine industry. "It may well be a more permanent condition," Mclnerney suggests. "We are looking at lower growth rates and, in many cases, declining ad revenues in major categories, combined with tighter margins than ever on the circulation side and ever-accelerating costs overall."

In other words, the best thing publishers can do now is get their portfolios in order.