On
the Block?
Sales
of Book Businesses Plummet, But the Big Keep Getting
Bigger
FROM PUBLISHING
TRENDS (NOVEMBER 2001)
In
the third quarter of this year, merger and acquisition
activity in trade book and other consumer publishing
segments plummeted more than 40%, according to industry
figures tracked by investment banking firm Whitestone
Communications. Despite a flurry of speculation
over sales — for example, both Merriam-Webster
and North-South were whispered to be making the
rounds — we are told neither of these companies is currently
on the block. Chalk it up to the rumor mill. But the
on-again, off-again nature of sales across the entire
publishing and information sector can be seen as a telling
sign of the economic times. With smaller buyers sidelined
by the economic downturn — and larger buyers skittish
on deals as their market caps turn south — the result
is less competition among bidders and hence sinking
prices. “It’s a tough market to be selling into,” says
one investment advisor. “Financial buyers can’t pay
what they used to. And many of the mid-size companies
up for sale don’t even raise the eyebrows of today’s
big publishing conglomerates.”
It almost makes one nostalgic for the go-go ’80s, when
junk bonds ruled the day and staid Boston banks were
throwing cash to the wind as big companies of all stripes
clamored to get book businesses under their belts. “Publishing
was seen as a sexy industry,” recalls Bill Hammond,
President of Publishing Strategy International.
“Having a media property in your portfolio was highly
desirable. But the sexiness seemed to fade away as the
financial reality dawned.” Flash forward to September
11, and that dawn looks even grimmer as recent events
put downward pressure on an already glum economy. “To
tell the truth,” The Daily Deal moaned this week,
“it’s been a wretched year for M&A as a whole.”
Wake
Up and Smell the Margins
Perversely,
such deal-deprivation for the book industry may mean
more business as usual. “Generally, the large companies
are going to continue to do acquisitions,” says Baran
Rosen, Whitestone’s President. “They’re always looking
to fill holes in their line, and they have the resources
to do acquisitions year in and year out.” In other words,
the big get bigger while the marginal get, well, more
marginal. It’s a familiar story, especially for those
who have weathered the boom-and-bust cycle of book-biz
demand. In the early 1990s, for example, publishing
companies lost their luster as free-wheeling financiers
woke up to smell the profit margins. “The banks retrenched,
and the debt component really went away,” Hammond says.
“The deal flow for many years dried up.” But eventually,
as the non-media conglomerates shed their suddenly unglamorous
book assets, deals began to flow again when today’s
book behemoths swallowed up the little fish in the pond.
Ironically, the spigot has now run dry partly because
all the deals have been done. “Due to the work of the
previous decades, there simply aren’t a lot of acquisition
targets,” says Hammond. “Norton is about the
only one of any significant size that is left.”
There are still a few items on the block, though, including
book distributor Consortium, which Hammond is
helping to find a buyer. In Consortium’s case, 86-year-old
owner Bill Brinton is selling the company “strictly
for estate planning purposes.” The company remains sound,
says Hammond, with first quarter fiscal year 2002 sales
“considerably above” sales for the previous year. Others
rumored to be for sale include Prentice Hall Direct,
which like many in the direct mail business is facing
a difficult climate. In fact, Prentice Hall corporate
parent Pearson had planned to sell the company
along with reference and business units to Hicks,
Muse, Tate & Furst, a deal that fell through
in 1998. (Other units were eventually sold, such as
Macmillan General Reference, which went to IDG
for $83 million.)
Some observers point out that such businesses are like
the industry’s latchkey kids, orphaned by their unloving
parents. Prentice Hall was acquired when Pearson bought
Simon & Schuster’s business and professional
operations, and was never a full-fledged family member.
Many divisions “have been badly mismanaged by their
parent companies for years,” says one industry observer.
“Larger conglomerates are constantly manipulating these
businesses for short-term profit. All these guys are
waking up to the fact that it’s not as easy as it sounded.”
(A Pearson spokesperson did not respond to a request
for comment.) On the other hand, analysts point out
that some of these same companies, when well cared for,
are not as subject to recessionary pressures as trade
publishers. The professional segments of book publishing
— including legal, medical, and educational publishers
— are supposedly sitting prettiest. “They’re hardly
impacted at all,” says Rosen. “That’s why those businesses
always sell for the higher range of prices. They’re
solid and reliable.”
Maybe the reference world has been spared, too. Reports
that Merriam-Webster was on the block have now
been quelled, despite a Wall Street Journal column
in August announcing that parent company Encyclopaedia
Britannica, “after stumbling in ambitious online
efforts,” had sought buyers to raise fresh capital.
Merriam-Webster, which has been owned by Britannica
since the 1960s, was expected to sell for between $20
and $40 million. But we hear the sale was put off amid
bidding from Random House, HarperCollins,
and McGraw Hill, after executives decided the
dictionary business wasn’t losing so much cash, after
all. “Encyclopaedia Britannica has officially halted
all activities relating to the possible sale of Merriam-Webster,”
according to Arthur Bicknell, Merriam-Webster
publicist. “It’s not true,” adds Britannica spokesman
Tom Panelas, when asked about the possibility
of a sale. He emphasized that Britannica is retooling
in the wake of the Internet bust, hinting that the dictionary
lines may prove a key asset in this regard. “Britannica
is in a back-to-basics mode after several years of concentrating
almost entirely on the Internet,” Panelas says. “We
are diversifying our product line and going back to
print, CD-ROM, and DVD. We’re also diversifying our
product offerings and revenue streams on the Internet.”
Gorging
on Growth
Despite
such retrenchment, several investment advisors report
that a variety of deals are still on the table. “We
have more deals now than we’ve had in the last five
years,” says Martin Levin of law firm Cowan,
Liebowitz. The company’s last deal was selling Lyons
Press to Globe Pequot, which is owned by
Morris Communications. Unlike the larger players,
Levin and colleagues are somewhat unusual in that they
focus only on one deal at a time, and don’t take on
a seller unless they feel they can close a deal. The
firm turns down five opportunities for every one taken
on. As for the boom in business, Levin notes that publishers
who came of age after World War II are realizing that
they’ve got to either pass the business baton to the
next generation, or sell it. (In the case of Lyons Press,
however, Nick Lyons’ son Tony is still with the
company, under the new ownership.) Also boosting merger
and acquisition vital signs is the fact that today’s
conglomerates prefer to grow by gorging on other companies,
which is “cheaper and faster” than internal growth.
Others agree that the downward trajectory of macro economic
trends hasn’t necessarily harmed the book biz as a whole.
“There clearly is a difference as you move from one
sector to another,” says Kit van Tulleken of
the eponymous M&A firm. “I don’t think you can look
at general fiction with the same eye as you look at
STM, or legal, or professional, or childrens. They all
have different cycles.” Certainly, there are big deals
to be consummated, at least in Europe: Cinven
recently grabbed Vivendi’s business and health
publications for $1.8 billion, and Finland’s Sanoma
WSOY snapped up VNU’s Consumer Information
Group for just over $1 billion. Even the trade side
shows signs of life. “Hachette has just bought
Octopus over here,” van Tulleken says of the
recent UK purchase. “I suspect that the price wasn’t
dramatically affected by September 11. I think it was
a top price anyway.” In that transaction, the French
publisher picked up the UK illustrated book group as
“a new step in Hachette Livre’s international development
in the anglophone arena,” the company said in a statement.
(Hachette is itself owned by French media powerhouse
Lagardère.) Yet in one sense, Hachette’s cross-border
deal is the exception to the recessionary rule. In boom
times, companies gunning for growth reach beyond their
borders for new markets. But in tough times, says van
Tulleken, contraction forces deal activity much closer
to home.
And magazines? Don’t even go there. “This is a tough
environment in terms of the outlook for the remainder
of the year,” says David Libowitz, Managing Director
at private equity firm Warburg Pincus. “Anything
that’s advertising-related is difficult. We tend to
focus on subscription-type businesses.” Another no-brainer
is a glance at the share price of the media behemoths
— who are now either unable or unlikely to cut big deals.
“That absolutely will have an effect,” van Tulleken
adds. Yet there’s still plenty of money around, and
some bargains to be had. “Even in the good times, travel
publishers are always for sale,” says Mark Pattis,
partner in Next Chapter Holdings and former CEO
of NTC/Contemporary, “and especially now.” In
the end, though deals may be depressed, you can bet
the market won’t lie fallow for long. “It’s like a crop,”
sighs Martin Levin. “It keeps blooming, each and every
year.”
©2001
Publishing Trends
