One of the longest running shows on Wall Street has come to town this week -- the UBS Warburg media conference, previously known as the PaineWebber show.
Given the uncertainty surrounding all-media stocks -- new or old -- I decided Monday to take the No. 4 train to the
Grand Hyatt Hotel
to hear what beleaguered managements had to say for themselves.
Because of the advertising slowdown and the dot-com debacle, most media stocks -- ad agencies, newspapers, magazines, dot-coms, radio and television, cable and programming companies -- are flat to way down this year. On the theory that in this market "beaten up" is better than "priced for perfection," I stopped by.
Few, if any, media stocks are as depressed as one of Monday's presenters,
. The stock peaked back in late March at $34.88 a share before cratering to a record low $7.63 last week. The company's presentation at the conference has given the stock only a slight boost to the $8- to $9-per-share range.
Worth a Look
Primedia is a creature of the bad old 1980s. In 1989, LBO shop
Kohlberg Kravis Roberts
, using borrowed money, bought a hodge-podge of specialty magazines and put them together into one company with an eye to selling out to the public at a higher price down the road. It did not play out that way. KKR did take the company public in 1995, but it has yet to hit an investing home run because the stock price has basically gone nowhere.
Primedia publishes about 250 niche consumer and trade magazines. (One-third are B2B titles, and two-thirds are consumer-oriented.) These tend to be obscure magazines like
National Hog Farmer and
that don't get much respect from the national media because they are small and not widely known for their editorial excellence. But these titles are not so bad as businesses. They are typically Nos. 1 or 2 in their markets. They generate steady cash flows. So, Primedia has a real business.
There is new management, which might be able to better utilize those assets. In September of last year, the board named Tom Rogers as CEO; Rogers trained at
under Jack Welch and was one of the guys who started
. Rogers made the presentation Monday and came across as a pretty direct, no-nonsense CEO who was not in denial about the market's view of his company. And he has pretty much cleaned house at Primedia and brought in new management with decent resumes from "Grade-A" media companies like
And then there is
On October 30, Primedia announced it was buying About, which in many ways is an online analog to Primedia. About.com has about 700 niche sites, and it sells ads on those sites to advertisers seeking targeted audiences. The Primedia strategy? Combine the off-line leader in niche content with the online leader.
Strategically, this makes sense. Primedia can save money that would otherwise be spent building a competing online network. It can also use the About.com network to promote its magazines. And, the combined company can offer advertisers an unusual combination of targeted ad opportunities. Rogers repeated claims that the combination of cost savings and cross-selling opportunities should boost the combined company's cash flow by $71 million by year-end 2001.
About.com is also one of the more successful online companies; it expects to be profitable by the first quarter of next year. It comes with $125 million in cash as well. Rogers projected that once Primedia has swallowed About.com and its faster-growing online business, the combined company should see cash flow (
EBITDA) grow at 40% in 2001 and 20% after that. Not bad.
So why did Primedia stock fall as soon as the deal was announced? There are several reasons. Primedia is paying $557 million, net of cash, for About.com. That requires Primedia to issue about 48 million shares to buy About.com. Those extra shares will reduce estimated per-share cash flow through 2001 by 5% to 10%, according to Wall Street analysts. In the current market, many investors do not want to wait to see whether the cash flow and revenue growth expectations promised by Rogers come in.
Morgan Stanley Dean Witter
publishing analyst Doug Arthur, who downgraded Primedia after the deal was announced, made the bear case in a report written soon after the deal was announced. (At the time, Primedia stock traded at $11.31.)
"The logic of the acquisition makes excellent sense to us," Arthur wrote, "but asking long deprived Primedia shareholders to wait another three to four quarters for this company to get earnings traction is a bit much in our view. In addition, there are obviously major near-term questions on the vigor of dot-com advertising (60% of About.com's revenues in the recent 3Q), and there are questions as to whether PRM's management's projected contingency for sales force dislocation ($80 million) proves accurate."
"Then there is the matter of timing -- which was clearly dicey," continued Arthur. "Why do we say that? Investors in Primedia had just listened to a third-quarter results conference call in which management emphasized the progress they were making on organizing top-line growth, in deleveraging the balance sheets, cutting costs, and growing internally vs. PRM's long history of growth via acquisition. Then, one business day later in the worst dot-com tape since the Internet arrived on the scene, the company announced a major Internet acquisition including almost $170 million in annual amortization for the next three years. This has the effect of morphing our original $144 million
estimated 2001 operating profit to a new, preliminary operating loss of $41.5 million for 2001."
That sounds pretty bad. So why were two smart young hedge fund managers I ran into at the conference intrigued by Primedia stock? (Both are up double-digits on the year.)
One said, "It makes a compelling story for bringing new- and old-line media together without blowing up the balance sheet of the old-line media company. It creates a 'new media' company that has the cash flow to ensure that it will not go bankrupt."
The other added: "I think we like it for the same reasons. The stock is not especially cheap at 9 to 10 times EBITDA for a media company. But it's not especially expensive either. If they can get the 20% EBITDA growth Rogers say they will, that would create an additional $3 a share of cash flow each year. $3 a share is big when you are talking about a $8 to $9 stock."
So if you are looking for a "busted media" play, take a look at Primedia. Do some more research. Wall Street has given up on media stocks in general and Primedia in particular. That is precisely why an investor might want to start poking around.