Sales of Book Businesses Plummet, But the Big Keep Getting Bigger
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.”