BUSINESS BLOGS
BUSINESS BLOGS
category: business
21 Feb 2007

Confession time: Rupert Murdoch was my one-time boss and Maxim was once my biggest competitor. 

Somehow I feel like they have something in common.  I can’t speak for Mr. Murdoch but I did beat Maxim at its own game (men’s publishing) when I took them on. 

Maxim’s owner Felix Dennis is contemplating selling his stable of magazines and has hired venerable investment banking firm Allen & Co. to find a buyer.

Earlier this week, I wrote something outlining some of the likely buyers.  Right before pressing Publish, I removed the last candidate I had: News Corp.  Naturally I had a couple of emails from folks asking me why no love was shown for News Corp.

So here goes.

News Corp. just did a deal with Roo giving them 5% + 5% upside in exchange for a business relationship.  In other words, no money changed hands.  But what was interesting is that it was News Corp. - and not its online division Fox Interactive Media (FIM) - that did the deal with Roo.  Roo, it should be stated, is an aggregator and distributor of online video.  That’s right: online.  Despite that little detail, the brass at News Corp. did not think it would be necessary to loop in FIM. 

This is particularly interesting in the Maxim/Blender/Stuff context for the following reason:

FIM plunked down $650M for IGN, the supposed leading men’s network in the 18-24 and 18-34 segment online.  IGN does well with advertisers.  But next to MySpace - its over half-a-billion-plus M&A baby - it has flatlined.  As such, for FIM to go out there and spend an additional few hundreds of dollars on another men’s property suggests that they shot a blank with IGN.  In other words, if you are already so strong in the men’s demographic, why double up and waste resources? 

Of course, this is coming from someone like me who views content as one, no matter of whether it is digital or not, in other words, to me, Maxim’s print content and IGN’s digital content are one and the same: it’s text content, just happens that one is in print and the other is in digital. 

What is different is the perception and appreciation the stock market has for one versus the other.

I am glad you raise that point.  Digital content/media is fetching anywhere from 15 to 40 timed EBITDA.  IGN got FIM to pay 40 times EBITDA in 2006.  In 2005, the average multiple in digital media M&A was 15.9.  IGN was a solid asset so it could get that as it also had Viacom knocking on its doors.

Print?  Not so fast. 

Let’s examine some historical data, source being an old article dating to 1999:

In general, cashflow multiples for magazines had declined from the 10x to 12x multiples of the late 1980s to multiples of between 6x and 8x cashflow. That meant that a business with cashflow of $10 million that might have been worth $100 million to $120 million in the late 1980s was now valued at only $60 million to $80 million.

Magazine owners and investment bankers were suddenly awakened by the announcement that Dutch media conglomerate VNU was acquiring BPI, publishers of Billboard, Hollywood Reporter and a number of other business-to-business magazines.  It was disclosed that the purchase price was $220 million–which translates into a 14x to 15x multiple of the prior year’s cashflow.

But the downward trend of M&A mutliples has continued to fall.  This year, Time just unloaded a myriad of publications including Popular Science for $100 million less than it was hoping to sell them for to Swedish-based publisher Bonnier magazine.  Paid Content pegs the deal at $210-240M, which means a 10.9 multiple.

Buy low, manage high…

Rupert Murdoch is one savvy investor.  I am not sure how well he would get along with Felix Dennis.  But Mr. Murdoch - I can tell from my limited experiences with him - ultimately looks at the bottom line to make a business decision.  In other words, if he sense that he will lose something - say for example money, time, a deal or a legal fight - he will throw in the towel.  I’m just guessing of course.

And buying print now (a under-appreciated asset) is a good move, but doing so implies that the deal is a non-FIM deal.  Allen & Co. - I would assume - will try to position this in the context of the digital upside.  That’s why - one would assume - they get paid the big fees.   I’m just guessing of course.

The real hidden, untapped value of Maxim, Stuff and Blender lie in their digital side, especially when you consider that Myspace, despite all of its hype only generates $25M per month in revenue. 

News Corp. generates nearly $20B in revenue, almost half of top global media company Time Warner, so even if Felix’s mags generate $250-500M it is almost immaterial.  It is what they bring to FIM’s digital ambition that is interesting.

When I competed against Maxim online, I knew that as noble as our efforts were, the day Maxim wanted to go all out on the Web, we’d be dead.  In the end, it was Maxim’s decision to begin to focus on digital opportunities that drove the founders of my old company to cash out.  Over time, Maxim was too strong for any one player to fight.  Dennis wants to sell Maxim, and Maxim is one of the major brands in the world today.  He should be able to command top dollar, and that means shifting the focus from print to digital.  Mr. Dennis missed the opportunity to do so in 2000 when he and his editor Keith Blanchard threw in the towel on the Web, hopefully he has learned his lesson this time around.

You brought up MySpace.  I am glad you did.   While MySpace is a mainstream social networking site, at its core, it is a promotional tool for media and entertainment in the sense that it was musicians and artists (largely unknown ones) who used it as a promotional and publishing platform that led to the viral explosion thereof.

But MySpace has seen that platform be hijacked by the double-edged sword of user generated content.  Think about it: if MySpace could tap into Blender, Stuff and Maxim’s amazing content then the 1+1 would really be much more than 2. 

And therein lies the challenge: for News Corp. to really unleash value here, they should approach the deal as a print acquisition (lower multiples) but then manage it largely as a digital one (higher multiples, more upside etc). 

What is Dennis’ assets worth?  On Day 1, there was a $250M figure thrown out.  Then suddenly other media spinsters began to hurl out a $500-750M price tag.  At $250M, it’s a great asset to acquire for any company; at $500-750M, it’s an integration nightmare for News Corp.  Don’t forget that FIM impresario Ross Levinsohn is long gone.  The word on the street is that News Corp.’s major online buys are behind it. 

How Much is Maxim/Blender/Stuff Worth?

What does this all mean? 

The multiples will range much closer to 10.9 than IGN’s 40 since the lion’s share of Maxim, Stuff and Blender’s revenues come from print and not online.  Profit margins in print magazine circles tend to range from 10-30%.  Maxim’s lavish parties notwithstanding, I’d guesstimate their margins to be 20%.

No doubt Maxim/Blender/Stuff magazines make a lot of money.  And of course, the company has a dizzying product assortment meaning that they make a lot more money at the top level.  I am purely speculating, but say the total sales are $250 million, with a 20% margin, that is $50M in profit, project that over a 12.5 multiple (10.9 is so beneath Allen & Co. and Felix Dennis, after all) and you are at a valuation of $625 million.  And, let’s face it, finding a private equity firm to pay more than 12.5 times won’t be hard, after all, those parties are something that any self-respecting banker would love to attend.

Incidentally, that is a price between what News Corp. paid for IGN and MySpace parent Intermix.

Between all of the free advice we’re doling out to News Corp., Felix Dennis, Allen & Co., you’d almost think we were on their payroll and we owed them one