Valuing your publishing business

Piers Russell-Cobb shares his thoughts on the transaction process in this article which was first published in the PPA's "Guide to Buying and Selling Magazines"
"Merger, acquisition, divestment, and the management of the corporate portfolio in the business environment of English-speaking countries... are the fastest and most effective ways of engineering changes in strategic direction and accomplishing strategic goals."
[John Kay: Foundations of Corporate Success]

Selling intellectual-property-based assets involves telling a story and using the information you have of the Vendor Company and the market it operates in to maximum effect. The facts in the selling story are the numbers, but it is presentation of the positive context of these figures that leads to the best price.

A basic valuation of a magazine company comes from the numbers: Turnover, EBITDA, DCFs, growth rates, subscribers, renewals, advertising history and the like. Ratio analyses are also useful means of measurements, which allow comparisons with the properties that the acquirer already possesses and to recent transactions in the market place, but acquirers need industry people to help in their interpretation. Paradoxically, strictly numbers people can be prepared to pay more than a business is 'worth' as they are hidebound by their own formulae. They are certainly easier to argue with than those who know what is happening to the advertiser, reader or supplier in markets. However financial considerations alone do not value media properties.

Holding a price and being paid for the unquantifiable fuzzy, cuddly factors is the process by which entrepreneurs are getting cash for extracting value for their historic skills in building up their franchise or brand.

Peter Brook in The Empty Space said "I have often found that the set is the geometry of the eventual play, so that a wrong set makes many scenes impossible to play, and even destroys many possibilities for the actors. The set designer evolves step by step with the director, going back, changing, scrapping as a conception of the whole gradually takes form."

I am a great believer in the Information Memorandum (IM). Like the set in a play, it is in this space that the vendor with his broker can set down their story covering all the bases and drawing attention to all the positive attributes of the business. The IM can also predict and soothe concerns about negative attributes of the business. The IM gathers all the pertinent information of the business to whet an acquirer's appetite. It enables owners a brief time of navel gazing, role-playing, prediction and argument before the anxious and quick-witted demands of the sale process itself. To adapt Hazlitt on Criticism a good IM should: "reflect the colours, the light and shade, the soul and body of the magazine business... what the essence of the magazine(s) is, what passion has been touched and how skillfully, what tone and movement the publisher's mind imparts to his subject or receives from it"

The IM is an intellectual mannequin dressed with information provoking an acquirer to see how the target would fit into his structure were it to come to life in their organization. This mannequin has characteristics and values that could add to the dynamic environment in which the acquirer is directing the unfinished play he is scripting with his own characters and the business environment in which he is working. Each magazine's character is summarized in its title, its masthead its brand. Enhancing value is the result of setting out logically on paper the vendor's distinctive capabilities and selling someone else the dream, vision and opportunity of the business.

I have been economical in describing the buy/sell process and assume some knowledge of transactional situations to which these could refer. As Ezra Pound said in his ABC of Reading "Any general statement is like a cheque drawn on a bank. Its value depends on what there is there to meet it."

So the remainder of this piece is in short hand and deals with value drivers and enhancers derived from the motives of the seller, the strategy of the buyer, the property itself and various attempts to formulate value of intangibles in deals. In the lists, I have not tried to be complete but simply to set the boundaries of considerations.

The seller

Money is only one of the outcomes for the vendor from selling. Whatever the deal there is a change of status within the organisation and outside. A happy vendor is one who has visualised their new place internally and in whatever society they move in. They cannot trumpet their independence nor represent themselves as the company after the sale.

Contributory factors that have caused the sale could be any one of the following problem solvers:

Heirs are not apparently up to the succession job and therefore they need to think of estate planning
Fellow directors and shareholders are troublesome and do not share the vision of the future
Scale, geography, scope of the organisation has reached the maximum for the capital base that the owner feels comfortable with
The individual title is now too small for the ambitions and capabilities of the entrepreneur
The owner feels that they have too much capital tied up in one enterprise and wants to diversify risk
The owner feels that they have lost touch with the market, or the market is developing in a way that they no longer feel able accurately to predict.
Markets are telling the owner that it is right to maximize the value of what has been built. A good example is all the content companies who sold themselves into the internet operators for hefty multiples of what they would have earned as pure magazine plays
The distinct feeling that running a magazine business is not as much fun as it was
Seeing opportunities in other markets
Retirement

Discounts to market rates occur when sellers specify that they do not want to sell to some organisations (because of what they suspect they will do with their babies) and others who only want to sell to identified organisations.

Strategy of the buyer

One senior magazine group's first question of an acquisitive executive is always the same: "Can you screw up the business?" Buyers frequently give away too much of the value they add to a to-be-acquired business. They do this by omitting to consider the likely value of the business to another player, and by giving away their interpretation of value by demanding information unrelated to the P&L. One of the broker's many roles is to ensure that if a transaction does not happen, the vendor has not given away any strategic information to a would-be competitor.

The rationale for acquisition must principally be that the value to them of the proposition is equal to or greater than the costs of the acquisition itself. However there are also a whole host of strategic and tactical reasons that include:

A growing market
Costs of competitive launches outweighed by value in an acquisition
Taking on other title(s) allows new owners cross-selling opportunities
By becoming more predominant in a sector they can more profitably launch brand extensions-exhibitions, conferences,more generic industry wide internet sites-in other words raise their visibility in the sectors
Buying in excellent management
Getting to a scale and size where exit options are increased-e.g. by being attractive to public markets and increasing the value and liquidity of stock options to management
The acquisition of tax losses that can be set against highly profitable core businesses
Synergistic benefits not just in business terms but in closing the gap in the relationship with the reader
Prestige and an enhanced reputation in the industry
Finding a business for a family member to cut their teeth on, and/or run with
The acquire-to-fold method of dealing with a competitor
The wish to stretch underused management capacity. Or to use an enlarged proposition to test the skills of existing staff.
The why-give-it-to-the taxman philosophy
The wish to bring in-house a part-time staffer
Diversification whether by subject or by geography as a way of shielding risk inherent in the exposure in the core business.
Platform purchases
Building a sense of momentum in the acquiring group
Because the acquirer has always wanted the target

Attributes of the property itself that add value

A. Language and geographical scope
B. Brand
C. Market position-market leader advantage
D. Market share in clearly defined industry
E. Relationship with reader who goes nowhere else for industry information
F. Reader/Advertiser research findings
G. Attractive market segment
H. Design and packaging advantages
I. Readers not drawn by too many added value ad-ons (eg cover mounts)
J. Not too high a learning curve for acquirer
K. Entry/exit barriers
L. Quality of content
M. Premium price
N. Strategic fit
O. Reconcilable goals with the acquirer
P. Time horizons
Q. Unique Software in production or databasing
R. Unique distribution channels or relationships with majors
S. Useful transference of know-how
T. Timing

Incidental thoughts

Launching is by many measures a higher risk strategy than acquisition. You are dealing with the unknown. Acquisition should be a quantifiable risk. It takes time to develop revenue streams-advertising agencies rarely commit at all and certainly not for the long term to new titles-I reckon it takes at least a year for agencies to be relaxed about the proposition.

As well as managing the process itself the acquirer has got to decide on how to manage the news of the acquisition. Simply put you can follow e.g. Paul Getty in letting it be known that he was after the target. When he acquired the cricket publishing assets in Wisden media players dropped out of the bidding as they knew their opponent was determined to acquire this cricketing franchise and had the means to do so.

Or more commonly not letting anyone know that you're in the game and what it is about the business that you value. This results from the general fear that competition will drive up the price of the asset to be acquired.

Formulating the intangibles in deals

Much thought has gone into how we value a brand. Principal concerns are how to bridge the gap between intangible perceptions of a brand and the revenues realised from it. Essentially, what brand owners want to know is how a consumer is likely to divide up their total category expenditure across the set of available brands.

Capitalization of income valuation:

Various people have tried to make a science of valuing the intangibles of deals. One such method which might be appropriate to magazine companies and their titles is outlined in a book by Richard Snowden "The Complete Guide to Buying a Business" In this Snowden suggests that each factor be given a rating of 0-5. 0 being negative and 5 the most positive. The average of the factors is the Capitalization Rate. This is then multiplied by the buyer's discretionary cash and determines the multiple that should be lent to the market value of the business to be acquired.

Richard Snowden cites a dozen areas that should be considered when using Capitalization of Income Valuation. His twelve factors are:

Owner's reason for selling
Length of time the company has been in business
Length of time current owner has owned the business
Degree of risk
Profitability
Location
Growth History
Competition
Entry barriers
Future potential for the industry
Customer base
Technology

Add up the total ratings; divide by twelve. Then multiply by 75% of the owner benefit (defined as 2.28 times free cash flow). This gives you a market value. But this is inherently capped as a multiple and we probably need to invent a new scale particularly to explain media multiples.

I hope that we have covered many of the facets of the non-number side of transactions. Many emotive factors come into play in the acquisition process. All the factors above affect emotions and perceptions of risk, which is what gives rise, eventually, to differing valuations. Sellers prefer one buyer to another; buyers become keener because they like and trust the vendor. But in the end these non-financial factors do indeed affect the market price. And lest we forget, sometimes what makes an acquisition work for the buyer and the seller is pure good luck and publishers should recite the Robert Herrick verse:

So Good luck came, and on my roof did light,
Like noiseless snow; or as the dew of night:
Not all at once, but gently, as the trees
Are, by the sunbeams, tickled by degrees.

But as some wise man said, the harder you work the luckier you are!

Piers Russell-Cobb, MediaFund Limited

July 2001