Companies can split apart but some things never fade

Michael Hedges March 7, 2008

When a large publicly traded company decides to dissolve itself, without the assistance of the bankruptcy courts, we are left to watch and wonder what could possibly have gone wrong. It’s an assumption mistaking longevity for success.

If all goes according to plan, Emap PLC will cease to exist March 20th. The last bit sold to a new company, Eden Bidco, formed by private equity fund Apax and Guardian Media Group, a company itself transforming to the 21st century mode. Inevitably this new venture will likely be spun into Apax owned B2B publisher Incisive Media though Apax decided not to immediately merge the two. In the weeks and months hereafter there will be the vanishing, business units deemed not worthy. Even Eden Bidco, incorporated in the Cayman Islands, could disappear within the ether of high finance.

Emap’s storied collection of media business units are, mostly, the property of others. In time, some will vanish. One and all should take comfort that the business cycle remains in proper working order. There is an end to everything.

Business applies selectively laws of physics and rules of psychology. Take entropy: matter at rest tends to fall apart. To shareholders in publicly traded companies, share traders and bet takers this law takes precedence over all others. Expand or die is the corollary.

The 1996 sale of the newspaper division to Johnston Press was a major turning point. Emap had jumped into the consumer magazine business with vim and verve. It developed a certain forte for in the consumer magazine sector, able to profit from a strategy of launching new, often faddish, titles…and often. Newspapers were pre-history and needed to go. Operating profit from its consumer magazines rose more than 150% between 1994 and 2004. 

Expansion was hardly limited to the UK. Emap became the 2nd largest consumer magazine publisher in France with the 2003 purchase of Excelsior Publications (€90 million) after acquiring several consumer titles over four years. Competition from Lagardère and Bertlesmann, able to toss out new titles quickly, chewed up the Emap French publications. By mid-2006 Emap sold to Italian publisher Arnoldo Mondadori Editore (Berlusconi) for €550 million.

But ventures in the United States proved disastrous, eventually claiming the head of CEO Kevin Hand. Purchasing titles from Peterson for millions, and left at the door-step in the bidding for Times Mirror, Emap sold its US business to Primedia in 2001 at a substantial loss.

It was the business-to-business publishing and services sector that gave Emap great cache, certainly among investors, as potentially resistant to consumer mood swings. Trade magazines are about the least sexy of all publishing. But add data-bases, web-sites and the conference business plus all the marketing savvy learned from consumer publishing and the B2B business became the one to watch. In August 2004 Emap bought the Cannes International Advertising Festival for £52.5 million ($97 million). An Emap statement at the time hope for “lots of cross-furtalization” with magazines. The statement also said “we're buying it as the advertising cycle starts to pick up.”

Another turning point must have come sometime in early 2005 when the accountants finished the 2004 annual report. Operating margin for consumer magazines was 17%, compared to 25% for radio and 27% for B2B.

With the 2005 takeover of Scottish Radio Holdings (SRH) Emap had become a serious broadcasting company in the UK with valuable assets in Ireland. Newspapers, again, were unwanted, Emap selling SRH’s Score Press to Johnston Press. Emap’s radio units grew, taking top positions in the UK, and all was good until ad spending stopped growing.

When boards utter the words ‘strategic review’ senior executives begin packing their parachutes. This is the application of psychology’s ‘hierarchy of needs’ theory (Maslow 1943): detaching safety and security leads to neurosis.  Actually, the proverbial ‘strategic review’ comes in two phases. The first typically involves the services of a large, highly reputable business consultant, the stated intent being ‘restructuring’ – meaning cost control, management change or both.

Investment bankers conduct the second stage of strategic review to ‘maximize shareholder value.’ By this stage boards and shareholders are seeing life flashing before their eyes. There is no argument about investment banker fees. Investment bankers apply the dominant law of physics: gravity.

In late 2006 Emap’s board appeared to panic. McKinsey & Co. was commissioned to conduct a ‘strategic review’ and bring about £20 million in savings. In May 2007 chief executive Tom Moloney resigned ‘by mutual agreement.’ By the end of July the board hired investment bankers Citigroup Global Markets and Lazard & Co. for the ‘disposals of Emap Consumer Media and Emap Radio.’

Immediately after the investment bankers started beating the bushes for potential bidders, Apax Partners offered to buy the B2B division. Reed wants selected parts. There was several offers for the radio stations. Nobody wanted to buy Emap whole and intact.

An agreement to sell Australian radio stations came quickly. The Irish radio stations were sold to Denis O’Brian’s Communicorp.

Most audacious in the break-up saga was the sale of Emaps’ broadcast and magazine units to Heinrich Bauer Verlag. For a billion euros the German publisher out bid – and shocked - the UK media establishment. Bauer, indeed, offered more money but better. It was cash. Unlike others who had sniffed around the family owned and low-key buyer needed no complex financing plan. Bauer had become the UK’s biggest media company, announced German media wags.

This left Global Media’s Charlie Allen, almost, tough-tied.  Global Media, a consolidation vehicle, was formed on the acquisition of Chrysalis, predicated on the belief it would one day scoop up Emap’s radio stations. That plan was turned on its head.

Global Media, in a crunch for ad inventory, advertised a bid for GCap, the ‘Belgium’ of UK media (two cultures, two languages). The 2004 merger of something and Capital Radio created the UK’s biggest and most indebted commercial radio broadcaster. As Grant Goddard of Enders Analytics notes, GCap has lost 4% of its aggregate audience each year since consolidation. But Charlie Allen is less interested in audience than spot inventory. He upped his bid for GCap’s shares three times in two weeks, refused outright by the GCap board initially, now ‘under consideration’.

At the end, the B2B units became Emap’s Achilles heel, albeit a golden one. Trade press is the least sexy of all media, unless you’re an accountant. For a brief moment in December after selling its consumer publishing and radio to that nice young man from Germany Emap’s board hesitated selling the B2B business. 

Apax/GMG will pay about $2 billion. Once Incisive Media hooks together the Emap units in 12 to 18 months it will be a $4 billion business, with $1.2 billion in expected annual cash-flow. GMG will hold 30% and cash the dividend checks to support its major newspapers. Less than a year ago GMG sold a 49.9% stake in Trader Media Group to – that’s right – Apax for £675 million. Apax also bought American Lawyer last July for $630 million. It, too, will remain separate from Invisive Media until the European leveraged loan market improves.

Reed Elsevier, a failed bidder for Emap’s consumer magazines, is another example of unintended consequences. It’s put 400 trade titles up for grabs, notably Variety and Broadcasting & Cable. Apax Partners is circling. Reed’s statement, “we’re reducing exposure to advertising markets and cyclicality”, came after announcing the purchase of ChoicePoint for $4 billion. Reed isn’t putting its highly profitable trade expo business up for sale, yet.

Slowly but visibly the arrival of good German accountants is being felt. Heat magazine editor Mark Frith announced his departure last week to write a book.Dharmash Mistry, head of digital operations, departed the next day. Mistry championed Emap’s acquisition of YoSpace – dubbed ‘YouTube for mobile phones.’

Not limited to high priced executives, Bauer’s accountants have turned their attention to reducing printing costs. The company confirmed to PrintWeek (February 28) a new production tender, looking at “all options.” Print runs for some titles will almost certainly move to Germany.

Last week Emap directors disposed of their shares.

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