How many ways can you skin a cat?
Johnston Press solved its debt problems by asking investors for cash and accepting the advances of a Malaysian billionaire.
Now comes Informa. After experiencing debt-induced palpitations, the £1bn-turnover B2B publisher is wondering whether it might be best to fall into the embrace of United Business Media.
Actually, the merger-of-equals rhetoric isn’t too far wide of the mark. The markets value Informa at £1.8bn and United Business Media at £1.6bn.
Neither company looks particularly distressed in operating terms. Despite the current signs of a slowdown, both Informa and UBM grew at around 9% last year — not bad at all for companies of their size.
There’s symmetry at the level of motivation, too.
Informa has £1.25bn in debts and wants to reduce that number — fast. Combining with UBM, which has minimal debts, will improve matters. Besides, both companies will benefit from up to £50m of cost savings if they merge.
For its part, UBM will benefit from a deal by reducing its dependence on print and advertising revenues.
The result would be a post-print B2B behemoth turning over £1.7bn a year.
How problematic are Informa’s debts? This, after all, is a company that has grown rapidly on cheap credit. In 2001, Informa was a £300m-turnover company focused on subscription revenue and events.
Just seven years later, its revenues have quadrupled via apparently well-chosen acquisitions in academic publishing (Taylor & Francis), conferences (IIR) and research (Datamonitor).
Last year, however, Informa’s net debts reached a peak of 4.8 times the company’s operating profits.
By comparison, Johnston Press was forecasting 2008 net debts of 3.5 times operating profits before company announced its rights issue. (The multiples involved are similar to the ones used by building societies to assess the size of mortgage they’ll give you. If in doubt, think of your salary as operating profit. In the current climate, multiples higher than 3 aren’t popular among investors.)
How did Informa manage to rack up so much debt? During the naughties, it made big acquisitions. But the company’s fast-growing cashflows easily covered its interest bills.
For most of the decade, Informa looked like a good bet to bankers. It was a publisher with interests in virtually every media format you can imagine, apart from the dodgy no-go sectors of print and recruitment advertising. (In 2007, ads generated just 3% of Informa’s revenues).
Now, however, investors are much more worried by the speed with which B2B publishing profits might decline. Under these circumstances, interest repayments could become burdensome — very rapidly.
That’s why, as with Johnston Press, investors have been shunning Informa’s shares. (During the past year, Informa’s share price has dropped by one-third. The UK media sector as a whole has declined by 25%.)
It also looks as if Informa’s buoyant margins have started to slide in recent months. Helpfully, the combination of UBM with Informa should reduce the merged company’s debts to much more comfortable 2 times operating profits by 2009.
In recent years, United Business Media has avoided mega-deals. But that’s not to say that the company’s managers have been asleep at the wheel.
Far from it.
UBM has sold off Exchange & Mart, its 35% stake in Five and the NOP market research unit.
And since David Levin joined the company as CEO in 2005, UBM has spent almost £400m on 52 acquisitions negotiated by three separate in-house M&A teams in London, New York and Hong Kong.
UBM has been snapping up companies at the rate of one every three weeks. Few, if any, are what you’d call traditional B2B media outfits.
The aim has been to diversify away from the company’s declining roots in print.
But if Informa was self-consciously designed and built as a post-print B2B publisher, UBM still resembles a half-renovated Victorian semi with a skip in the drive and a concrete mixer in the garden.
In 2005, print accounted for 46% of UBM’s revenues. Two years later, the figure is 27.5%. Although UBM now draws four-fifths of its profits from events, databases and press release distribution, there’s still a way to go.
A merger with Informa would propel UBM squarely into the post-print future. The combined company would be largely focused on events, market research, databases and so-called workflow solutions.
In this respect, UBM-Informa could come to resemble Reed Elsevier, whose great leap forward involves selling off Reed Business Information, its magazine division.
If the UBM-Informa deal goes through, and if Reed Elsevier offloads RBI this summer, it will mark a decisive parting of the ways among B2B publishers.
Incisive Media, EMAP — plus whoever buys RBI — would remain as the major players in traditional B2B publishing. Two of this trio are already owned by private equity investors. RBI could go the same way, setting the scene for dramatic restructuring away from the limelight of the public markets.
That’s one scenario.
Plenty of others exist — including a potential counter-bid from private equity investors for Informa. Potential bidders understand investors’ fears that UBM will buy Informa on the cheap.
But by sucking hard-to-find debt financing out of the market, an intervention like this could derail Reed Elsevier’s plans to auction off RBI.
What we’re witnessing is top-of-the-cycle consolidation. By the end of this year, the B2B publishing market will have changed out of all recognition.
Whether investors have sufficient appetite for risk to make the pieces of this puzzle fall to earth in an orderly fashion remains to be seen.
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