The new face of magazine finance - includes related article

Folio: The Magazine for Magazine Management, May 15, 1993 by Stephen Barr

Capital is flowing back into the industry as deep-pocketed newcomers discover the allure of magazine publishing. The rules of the game may be tougher now in the post-recession period, but for publishers looking for cash to grow, the way out of the money maze has become clearer.

When Dale Lang financed his first magazine in the late 1950s, he did it the old-fashioned way--with printer credit. "That was my banking," he says of the start-up of Select, a society monthly he published in Madison, Wisconsin. "I asked for 90-days credit, and that gave me enough time to launch the magazine. That's the way we did it in those days."

In the early 1990s, the CEO of Lang Communications discovered the hard way just how much times had changed. He spent nearly three years seeking a backer to buy out Time Inc.'s share of Working Woman and Working Mother, as well as the portion of Sassy held by Citibank Ventures. He met with more than a half-dozen potential investors, got close to a deal with some--but ultimately was unwilling to commit to stringent financial terms that would have put his management control at risk.

"They kept wanting to evaluate our company based on cashflow," says Lang, "and you couldn't value it with Sassy in a negative cashflow position. They'd say Sassy wasn't worth anything, and I'd ask them if a cable company with 500,000 hookups has no value. I'd tell them subscribers are valuable; we have a franchise and we're heading to profitability. They would do the deal, but they wouldn't do the deal we wanted to do."

Then last fall, Lang was introduced to Sandler Media Group, a successful New York City-based stock-picking house with over $600 million committed to media companies. Having watched media multiples fall, Sandler set up a fund for investing in private companies, the first of which was Katz Communications, the television rep firm. "They knew nothing of magazines," says Lang, "and they really dug in. They projected where the magazines could be five years down the road, as opposed to today's cashflow, and they were able to assign some value to Sassy."

The late-February announcement of Lang's still-pending deal with Sandler--which calls for Sandler to acquire a 50 percent stake in Working Woman and Working Mother, as well as become a partner in Sassy and Ms.--came just as interest in the magazine industry from venture capitalists and other sources of financial backing started to re-emerge.

At least three other equity players are also new to magazines, and are going about building new portfolios. These publishing financiers are operating according to a varied set of rules. For them, the themes these days are that equity financing is favored over debt, that sharply focused titles--often trade magazines--are highly coveted, and that solid properties will still command a hefty price even as the shake-out of weaker titles continues. As advertising revenues pick up and the industry gets its first intoxicating whiff of an economic recovery, investors smell an opportunity to build the publishing empires of the 1990s. What they're doing and what they're looking for may help define the financial characteristics of a successful publishing company throughout the rest of the decade. "What better time to look at the magazine industry than when it has been kicked in the teeth?" says Jeff Leck, a partner in Florida Capital Partners, a $30 million venture capital firm that has invested in Melville, New York-based PTN Publishing.

"For anything but a start-up," notes L. Mark Stone, managing director in AdMedia Corporate Advisors, a media consulting and investment banking firm, "there's not as big a shortage of equity financing as there is of debt financing."

Even some banks insist that they want to be players again, though about half of their business still involves restructurings. Boston's State Street Bank looked at 40 or so transactions last year (backing about four), and has reviewed 10 in the first two months of 1993. "We don't see a lot of pure acquisitions, which is what we like to finance," concedes Barbara Flight, a vice president in the magazine lending group.

Shake-out continues

The consistent theme among those most active in publishing deals is that the industry, in this post-recession period, faces a serious shake-out. "We feel the worst is over, but there are still a few too many titles out there," says Carl Thoma, a partner in Golder Thoma & Cressey, a Chicago-based venture capital firm that committed $20 million to PTN last fall. "Those that survive will do well." Golder Thoma & Cressey, which has an equity base of $300 million, had been looking at trade magazines before coming across PTN, which has grown from a handful of titles in 1987 to 18 now as part of a venture-capital-backed build-up strategy. Along with the support of Chemical Venture Partners, which has already put in $12 million and committed $20 million more last December, PTN is expected to double in size over the next few years.

"The days of financing with a credit card are over," says Leck, who shepherded the initial PTN investment when he was at Chemical. "If you want to grow, you have to have a pool of equity behind you."