The Primedia Mess: A Big Kravis Gamble Isn't Paying Off
One good way to tell whether a company is headed for trouble is to see whether the people who run it have the slightest interest in what the company sells. I'm not saying that Janet Reno wouldn't do a bang-up job of running Leslie Wexner's Victoria's Secret operation over at the Limited (LTD). But I am saying she'd have a lot of catch-up browsing to do through back issues of a catalog I doubt she's been reading religiously over the years. Janet Reno in a Miracle Bra? Well, let's just push on ...
... In this case, to the question of whether the recent "early retirement" of William F. Reilly as chief executive of New York-based Primedia (PRM) means a turnaround is now in the offing for the publisher of media properties ranging from New York magazine to Dog World, American Baby and Truckin' magazines. I don't think so -- unless a replacement can be found with an interest not only in those titles but in Soap Opera Digest, Horticulture, Seventeen, Lowrider, Fly Fisherman, Healthy Kids, Modern Bride, Practical Horseman, Surfing, Soybean Digest, Catalog Age and Weekly Reader, to name just a few.
It's just my personal opinion, mind you, but I don't think there is any educated person to be found anywhere on this earth who could set aside even an hour or two -- even once a month -- and devote it to leafing through the company's published outpourings to see how things are going down there in the engine room of the business. Dog World? Truckin'? Soybean Digest? No, I don't think so. And if the person who actually runs the company can't force himself to be interested in its products or services, why will anyone else care?
And therein, I believe, lies the reason for Primedia's currently headless travails as one of the longest-running crash-and-burn spectacles in the history of the American media -- a company created with no thought whatsoever for its customers, but only in how to go fishing for money on Wall Street using a hook baited with a mountain of leveraged investment in the with-it world of the media.It was nearly four years ago when we earned the undying enmity of the folks at Primedia (it was then known as K-III Communications) by pointing all this out on the eve of the company's IPO. They didn't like our observation that the company was nothing more than schlock goods, that it would probably never earn a dime of profit, and that, at the IPO's offering price of 10 a share, investors would be, in effect, better off just throwing their money out the window. Four years have since passed -- four years in which this stock has never once closed above 18 a share, and has instead mostly traded in a rut between 9 and 14. This, even though the Dow industrials have more than doubled, and rival publishers like McGraw-Hill Companies (MHP) have nearly tripled. In other words, during one of the most wildly explosive bull markets in the history of capitalism, this artificially concocted business -- slapped together expressly to exploit the buy-anything mania of investors -- totally and completely missed the boat. The company itself was bolted together by Henry Kravis, using a management team of bean counters from Macmillan after Robert Maxwell defeated Kravis in a bidding war for Macmillan back in the 1980s. Thereafter, Kravis got the bright idea of hiring away Reilly and his pals from Maxwell's new plaything, and thus was K-III born -- for no other purpose in life than to acquire media properties using borrowed money, create the appearance of growth, then sell out at some (presumed) huge profit into the raging bull market on Wall Street. Mr. Maxwell himself eventually drowned at sea, and thereafter it was discovered that he had looted millions from various of his employees' pension funds. However well or poorly the Reilly bunch did their jobs at Macmillan, it was instantly clear that they didn't know the first damn thing about publishing magazines or almost anything else. Almost none of the magazines they wound up buying were more than niche operations, with the result that it was impossible to gain economies of scale in advertising. In the end, every publication became just a crummy little free-standing operation, with nothing in common with any of the other publications in the company except their common ownership by a bunch of cost-crazed overlords at the corporate level, determined to ream every last dime of profit from the business while investing as little as possible back into it. It would have been great if Primedia's stock price had nonetheless soared the way that Kravis (whose KKR partnerships hold about 85% of the shares) and the Reilly bunch (who own more than a third of the remainder) had plainly expected. But the company's finances are so horrid no one has wanted to come near the shares. From its inception, the whole strategy of the company has been to get investors to focus only on the company's so-called EBITDA number (earnings before interest, taxes, depreciation and amortization). But an EBITDA-based business plan only makes sense if you don't have to keep borrowing more and more money to stave off collapse -- in other words, if your EBITDA grows faster than your actual cash costs in running the business. At Primedia, that ain't happening. Since 1996, the company's revenue has grown by 14.5%, but nearly all of that growth has been coming from the acquisition of various magazine titles. The company tries to fog the picture up by dividing its activities into "continuing" and "noncore" businesses -- which is to say into businesses that actually have some promise as opposed to nitwit acquisitions the company never should have bought in the first place. But the reality is in the aggregate revenue. That would all be OK, I suppose, if the cost of those acquisitions were somehow less than the money the company was getting back out of them. But that is not the case. Since 1996 not only have the actual operating costs that go into EBITDA calculations (corporate overhead, distribution and marketing, cost of goods sold and so on) risen 13.2%, but when you consider that interest expense has risen nearly 16% during the period, it turns out that the business' operations aren't improving at all but are actually deteriorating. The situation continues right up to the company's latest reported financials, for the quarter ended March 30. When that period is compared to the year-earlier quarter, revenue rose 19%, but operating costs rose 20% and interest costs rose nearly 21%. Primedia's balance sheet is so frightful it's downright exciting. The company has a 3.5% pre-tax, preinterest return on assets, but the cost of those assets is an interest load of nearly 8% on more than $2 billion in long-term debt -- and we're not even including another $53 million in preferred stock dividends, which are really just an ultracostly form of borrowing in disguise. And that's only the beginning. Consider Primedia's negative working capital of more than $195 million. This works out to a "current ratio" of 0.66 to 1, which means the company has only 66 cents of cash and short-term assets available to cover each dollar of short-term bills. That's one of the lowest of any publicly traded magazine publisher in the country -- worse than the 0.94-to-1 ratio of the Petersen Companies in their latest published financials before being taken over by British Emap in early 1999, and barely a third the current ratio of CMP Media, another recent magazine publishing IPO. The company is leveraged so alarmingly it's not even funny. Over the years, more than $900 million worth of preferred and common equity capital has been shoveled down the Primedia rat hole, along with another $2 billion in long-term debt. If the company were taken out today, shot between the eyes, and everything of value thereafter stripped from the carcass and sold off for parts, the creditors would still wind up short more than $100 million at the end of the process -- and that's the best they can hope for. In reality, more than $2.3 billion of the company's total assets -- that is, nearly three-quarters of all its assets on the balance sheet -- consist of goodwill and intangibles, representing how much the Reilly bunch overpaid for their magazines in the first place. Does anyone seriously think Primedia will ever get back 100 cents on the dollar for Dog World and the like? All this seems to have come to a head for Reilly when Petersen, publisher of such eye-glazing fare as Guns & Ammo, having gone public late in 1997 at 17 1/2 a share, turned around and sold out to the British bunch just over a year later for 34 -- a gain of nearly 100% in little more than 12 months. And there sat poor Bill Reilly, stuck with a stock price that had barely budged. Now he's out, having bagged close to $5 million in salary and bonuses in the last three years while leaving others to clean up the mess he helped create. My own personal belief is that it can't be cleaned up, but I suppose we'll just have to wait and see. In the meantime, you can reach me by e-mail at
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