Primedia's New-School Ambitions Leave Shareholders Pining for Times of Yore.
redherring.com
It has taken nearly six years and more than $2 billion in investor money to get to endgame, but it looks like the clock is about to run out for Primedia
By Christopher Byron
January 9, 2002
It has taken nearly six years and more than $2 billion in investor money to get to endgame, but it looks like the clock is about to run out for Primedia. In case you're not familiar with the name, the New York-based concern is the country's largest publisher of niche magazines. It also happens to own the once high-flying Internet search tool About.com.
Through a series of missteps culminating in a failed attempt to turn itself into what amounted to a new-media outfit, the company now finds itself fighting what looks increasingly to be a losing struggle for survival. Question: if Primedia couldn't make a go of it in the strongest bull market in history, why should investors think it will do better in a bear market? At a current price of around $2, the answer is already in: investors simply don't think it will (NYSE: PRM).
Primedia itself seems to be coming to the same conclusion. On October 25, the company told Wall Street analysts that it plans to begin selling off any of its operations that "can't be turned profitable in the very near term." In the end, there may not be very much left to the company at all. It's hard to see what combination of businesses Primedia could hang onto that would generate enough operating income to cover the interest payments of close to $40 million it faces each quarter.
Primedia was taken public in late 1995 by the buyout financier Henry Kravis, who subsequently has tried every gimmick imaginable to get its stock price to go up--and stay up. But not even a change of name, a change of CEO, or, ultimately, a change of focus from old media to new has succeeded in obscuring the fact that no company can survive indefinitely if it can't sell its products for more than its cost of doing business.
Several of Primedia's operations are OK businesses. The company owns New York magazine, for example, which invented the "city magazine" genre 33 years ago and remains to this day the best-known publication of its kind. The company also recently acquired a list of enthusiast titles, including Hot Rod and Motor Trend, which are also profitable on an operating basis and have loyal readerships.
But Primedia's problem isn't its publishing assets; the company's problem is the Mont Blanc-size pile of debt it took on to acquire them. Like a number of other companies created at the hands of financial engineers--most notably Ron Perelman's Revlon Consumer Products and Donald Trump's Trump Hotels & Casino Resorts--Primedia was built on a mountain of debt. Then, in typical '90s style, it was taken public in the hope that rising stock prices would enable the company to convert the debt to equity, get the interest payments off its back, and cash out at a profit.
But the stock market failed to coöperate, and Primedia's share price has collapsed. What's more, Primedia now finds itself with barely enough cash to cover even its interest payments, let alone to invest in its growth without borrowing yet more money. The debt--which stood at more than $2 billion as of September 30--is crushing the entire operation, and there may be simply no escape from the reaper. Primedia has no choice but to begin selling, at distressed prices, many of the very properties for which it paid top dollar.
Ironically, the biggest millstone around the company's neck is turning out to be the same new-media acquisition that was supposed to secure its future--About.com. This was the brainchild of Primedia's chairman and CEO, Tom Rogers, who left a successful career as head of NBC Cable Networks to take over Primedia after Mr. Kravis lost patience with the company's previous president and CEO, William Reilly.
Within months of taking over in October 1999, Mr. Rogers announced the first in a series of deals designed to reposition Primedia away from the traditional media world of publications like Dog World and Catfish Insider and toward the more dynamic, exciting-sounding world of new media. At first, the strategy seemed a license to print money. In March 2000, Primedia unfurled a stock-swap in which the company issued 8 million shares of its common stock in return for 1.5 million shares of stock in CMGI, the then-hot Internet "incubator." The move instantly added $1 billion to Primedia's market capitalization, even though the CMGI stock it had acquired was worth only $171 million. Mr. Rogers was encouraged to cast about for another rabbit to pull out of his hat for Mr. Kravis.
That's when About.com entered the story. Apparently not realizing that the dot-com mania was over, Mr. Rogers announced on October 30, 2000 that Primedia would acquire About .com in another stock-swap deal--for 45.2 million Primedia shares. "With this transaction, Primedia has been transformed. Niche is king," Mr. Rogers said. "Primedia is the leading traditional media company in the delivery of highly targeted niche print and video products to consumers. About is the leading online company in the delivery of niche content. This is the most synergistic combination either of these two companies could possibly enter into and creates a one-of-a-kind company that no two other companies could create."
Wall Street thought otherwise and knocked $655 million off the value of Primedia's shares--despite the fact that About had no debt, and its most recent balance sheet showed some $130 million in cash. The market was saying, in effect, to forget the cash, because the acquisition of About--which had never generated a dime of operating cash or earnings and almost certainly never would--would turn out to be a huge mistake, weakening Primedia enormously.
The transaction, completed in February of this year, added close to $500 million of essentially worthless goodwill to Primedia's balance sheet, along with About's cash, which by then had dwindled to $109 million. Meanwhile, advertising on the Web--the backbone of About's business--was in collapse. Subsequently, revenue at the online concern has fallen from $26.8 million in third quarter 2000 to less than $12 million per quarter now.
When you consider that About's revenue represents no more than 3 percent of Primedia's top line--and that the whole of Primedia is now being valued at just $480 million by Wall Street--it's hard to see how About, for which Mr. Rogers paid roughly $700 million in company stock less than a year ago, could be sold for much more than $14 million to $15 million today--if even that.
What a hosing! And it won't be easy to avoid taking a huge hit when the business is either sold or shut down. Remember that nearly $500 million of balance sheet goodwill? If About.com can be shed, the goodwill will have to be written off. That, in turn, would eviscerate Primedia's balance sheet, plunging its book value from just less than $150 million as of June 30 (hardly enough to get excited about in the first place) to a negative $100 million--rendering the company functionally insolvent on a balance sheet basis.
On the October 25 call, Mr. Rogers nevertheless reeled off a long list of reasons to be hopeful, nearly all of which boiled down to the argument that the company's core businesses are strong. The company's consumer-magazines segment accounts for close to three-quarters of Primedia's revenue and two-thirds of its operating profit. But heaped atop all these businesses is the debt that Primedia took on to acquire them in the first place. None of this debt helps magazines like New York or Seventeen publish brighter, more informed, more insightful articles; indeed, the magazines were doing that just fine before Primedia ever bought them.
No, the debt on Primedia's balance sheet was taken on for a different reason: to make a quick Wall Street killing through a strategy that backfired. Now all that remains are the interest payments that still must be made, quarter after quarter, even as the tide recedes from the "Great Bull Market" of the '90s. In time, those payments may prove too much, and Primedia will simply shuffle up the courthouse steps and look for relief in a Chapter 11 bankruptcy proceeding.
In truth, such a fate has been awaiting Primedia from the start. Here was a company--known initially as KIII Communications, referring to nothing but the Henry Kravis fund that financed it--that was concocted by a clique of financial engineers for the singular purpose of making a fast buck. The idea: assemble a collection of unrelated media assets, bundle them together into something exciting-sounding, sell the bundle in a Wall Street IPO, and then cash out for a big killing when the bull market rocketed the stock to the moon. Everything worked just fine, except the last part--the part where the stock price was supposed to go up but went down instead--and not even a fourth-quarter Hail Mary pass in hopes of scoring as a dot-com got the team across the goal line. Now, it seems, the crowd has begun to count down the clock. |
