BUSINESS BLOGS
BUSINESS BLOGS
category: business
02 Jun 2007

[Editor’s note: In February 2007, Felix Dennis hired Allen & Co. to find a buyer for his Dennis Publishing empire, which consisted mainly of Maxim, Stuff and Blender, publishers largely vying in the competitive men 18-34 space.  From 2000-05 I served as VP of sales, spokesperson, writer and minority partner for Maxim’s leading online competitor.  Our company was subsequently acquired for 27 times the investor’s capital by IGN, who in turn was acquired by News Corp.  Upon resigning I signed a non-conpetition agreement which expired May 27 2007.  As of today, Dennis Publishing has yet to find a seller, though rumor has it that an announcement is expected as early as this week, maybe even tomorrow].

Earlier this year, British publisher, poet and businessman extraordinaire Felix Dennis made it official and hired venerable investment bank Allen & Co. to fulfil his goal of unloading some of his print, event and digital assets.  The word on the street was that private equity firms like Quadrangle and Elevation Partners would be in the running, naturally.  The logic was that former magazine executives would line up bankers and make a run.

By the looks of it, an announcement was supposed to have been made last Friday, or I guess as early as Monday, reports MediaWeek: former Rolling Stone executive Kent Brownridge lined up Quadrangle and paid roughly $235M for Dennis’s three brands.  But how this came to be - and what could have been - was a story onto itself.

The Definition of Insanity 

They say the definition of insanity is repeating the same thing and expecting something different.  My point is: for a bunch of magazine guys to buy a magazine and expect things to fare differently is insane. 

That’s really not a knock at those gentlemen, the bankers who coordinated the deal or the assets in question, it’s a suggestion that maybe if they looked at the glass as half-full, everyone could walk away a winner. 

Print as a stand-alone media is not a winning strategy.  Print as a component in a media strategy with digital at is core is a winner.

It’s now been a few months, and I wondered, what ever happened to that sales process, so I just did a search for Who would buy Maxim.  The top two results were two article I had written earlier, and were picked up by Seeking Alpha.

In those, I avoided looking at which private equity would end up winning, because I was more interested in potential strategic fits:

In Part 1, I looked at potential acquirers: Ziff-Davis, Viacom, Walt Disney, Time Warner, GE NBC Universal.  Admittedly, the notion of a Walt Disney buying Maxim is crazy.  But, we’re not paid to do this for a living (not yet anyway), we just write about it.   

In Part 2, I said: “why not News Corp.?” and dug deeper as to a potential sales price.

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.

How Much is Maxim/Blender/Stuff Worth?

The multiples will range much closer to 10.9 (in line with magazine multiples) 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.

==

Today as I was digging deeper, I ran across an article - dated April 5, 2006 from Business Week and written by Jon Fine, who reported on the rumor that Felix Dennis was looking to offload Maxim Magazine, Stuff and Blender (as early as then, Dennis was keen on keeping politically oriented The Week). 

Fine wrote:

At its peak, which is not 2005, Maxim’s revenues were around $145 million and its profits were around $50 million, a former company insider once told me. The best guesses put profits today lower—around $35 million, perhaps a bit higher. UPDATE 4/10/2006: An insider insists current profits are more like $40 million.

(…)

Potential bidders: Time Inc., Hachette Filipacchi US Media (if headquarters in France allow them to ante up), private equity guys who’ve been sniffing around magazines.

Conceptually, I have a hard time imagining Hearst playing for it—but then they do publish Cosmopolitan, which is for women but not all that far from Maxim in terms of its risqué quotient.  

(…) 

Possible price: $350 million and up. UPDATE 4/10/2006: Going by the insider’s figures, the possible sale price starts around $400 million.

In all honesty, I wish I’d come across that article when I wrote my articles, because I guessed my figures for revenues and income, which were in fact higher than they actually are. 

My revenue guess of $250M was off, but as a sales guy who was doing $2.5M a year for an online magazine with nowhere near the brand or quality content that Maxim did, and adjusting for Web vs. Web + Print + Events, I really think that Maxim, Blender and Stuff could pull in $250M per year.   I was way off on the top line.

My profit guess of $50M was somewhat off the $40M that the Maxim insider reported and a lot higher than Fine’s $35M.  Frankly, even using the $40M figure, I was a whole 20% higher, I guess I’m just more fiscally prudent having run Web startups and not multi-million dollar enterprises with money to burn.

But even at a $35M or $40M profit figure (instead of my $50M), my valuation is WAY off, because I used a 12.5 times multiple.

Paid Content had reported on one deal where Time sold some magazines for 10.9 times profits.  So even at 10.9 times profits, and profits of $40M, this would imply over a price tag north of $400M.

Is Dennis going to get that?

Searching a number of industry websites this weekend, the answer is a resounding NO.

What is the word on the street?

Going into it, I had a very awkward feeling that my old boss Rupert Murdoch was going to surprise folks and buy it for $500M or so.  It does not make sense, since he has IGN which is a market leader online and buying it would be a massive waste of money…

[For the record, despite this post, I have nothing against Murdoch - apart his pro-war views.  In fact, I almost admire some of his ways, as evidenced by this post.  It’s a number of his lying and backstabbing minions that I hate, lower down you will see why this is relevant to this post].

By the sounds of it, interested parties include private equity firms Elevation and Quadrangle, with more than one source suggesting that:

Quadrangle Group, which is working with ex-Wenner (publisher of Rolling Stone) executive Kent Brownridge, is so far the most serious bidder among the potential buyers, which are said to be mostly private equity firms. Sources said Dennis received three or four offers in the second round of bidding, ranging from $200 million to $220 million, short of the $250 million or more Felix Dennis is said to want for his stable of men’s titles. 

Hmm?  Why the low offers?  Well, despite Dennis’ hopes, the auction turned into a rather silent process:

Sources also said that interest in the auction for Dennis Publishing Inc., publisher of “Maxim” magazine, is thinning amid concerns about its own growth prospects.

The auction underscores the challenges facing print media, which is struggling as readers and advertisers move online. The climate is especially hard for consumer magazines, with revenues from newsstands, subscriptions and advertising all under pressure from the Internet.

“Nobody will tell you magazines are going to be the fastest-growing business on earth,” said Quadrangle Group founder Steven Rattner, speaking at the Reuters Hedge Funds and Private Equity Summit in New York this week. “You have to have realistic price expectations … They are going to sell at single digits, or should sell, on a fully managed basis, on single digit multiples.”

In fact, as I dug deeper, I realized that indeed, the fate of print media was even more dire than I had anticipated.  There was also some story about a casino that did not go as planned.  Casino?

I also realize just how little my old company (I was a tiny shareholder, though the VP in charge of ad sales) sold for.  We had a 35% market share online amongst the men’s lifestyle content space on the Web.  We were, in fact, the Maxim online.

But the more I looked at the tepid growth prospects, the more I began to think that Allen & Co. deserved some credit for getting the private equity firms excited about the firm.

Of course, that’s not too hard of a job, because Dennis does have a fantastic franchise. 

The Definition of Crazy 

As I see it: 

- Maxim can be the Playboy of the 21st century. 

- Blender has what it took to become Rolling Stone, and I suppose Wenner executive Kent Brownridge saw that… since Wenner publishes Rolling Stone.

I suppose Brownridge has an axe to grind against Wenner, which is what drive a lot of decisions in media. 

In fact, it’s a shame that the timing was off.  Because if I knew that Maxim, Blender and Stuff could be mine for $250M, I’d probably recruit a private bank to back me and put in a bid myself.  Yeah, I know, sounds crazy.  Crazy perhaps, but not insane.

Insane is what I suppose Brownridge is going to be doing: running Maxim, Blender and Stuff as magazines.

I’d do the opposite. 

Plan B: What would I do?

- Subscriptions: 

As outlined in “Should Print Go Free?”, I’d leverage the balance sheet to make Maxim, Blender and Stuff free, at least largely.  Some people would want subscriptions before it “hit newsstands” and these would pay, sure.  But subscriptions would be cheap, really cheap and just barely to cover the cost of a stamp, if the price of a magazine was ridiculously low, trust me, more guys would read ‘em.  Read my “Should Print Go Free?” post and tell me I’m insane.

Mainly, I’d use the Web for direct distribution for the most part to give away a free issue to anyone who wants it.

Sure I’d still count on single-copy sales at airports, newsstands etc., but I would not mortgage my future on it.   The goal is to put whichever magazine I was hawking in as many hands as possible.  I’d sign deals with every airline possible and give them away for free.  Doctors, dentists?  Them too.

Trust me, every sane male 13-RIP would ask for the magazine and visit my website.  The CD is a support mechanism in music nowadays, similarly, the magazine is a support mechanism in media.

Subscribers would probably double from 2M or so to 4M, easily.  But total readership would skyrocket to many more. 

- Advertising:

With the greater magazine readership, I could make print advertising relevant and robust… but more importantly, I could leverage it all to bolster digital.  In turn, the website audience would probably also rise from 1M or so to 4M, if not more.

With this aggressive strategy, I’d get the online audience to 10M within a year, if not more, and 25M within 3 years.  I know, sounds insane, but at my old job in men’s online publishing, I helped double the site’s audience from 400,000/month to 1,000,000 in 2 months… the overall strategy got us to 5M in 3 years.  With Maxim’s brand, the sky is the limit… but not if you view Maxim as a quaint old lad mag.  If you see it as a platform agnostic brand, then yes, anything is possible.

Mind you… There’s no way to guarantee that, I know, but it’s a story.  A growth story.  And it’s awfully similar to what I was raving and ranting to my old boss when I took over his [online] magazine.

For Brownridge (don’t know the man, I’m sure he’s a gentleman and a scholar) to think that raising private equity money and trying to drain the Atlantic Ocean one drop at a time is sheer lunacy.  It’s insanity, in the sense of the definition.

My strategy would be to leverage the Maxim and Blender brand and reposition Stuff (right now, it’s like a diluted Maxim, I’d make is a straight on tech, electronics and well, stuff magazine) and focus online, all the way. 

Their text-based archives?  All online.

Their image archives?  All online, and on your phone.

Their video-based events?  All online.

Don’t get me wrong, offline in the form of events and print have a place in any company, but the core of any media company will be digital, not print. 

A Dark Horse: Yucaipa/Sourcelink

So as I was sifting through industry rags I saw that there’s one dark horse possibility that one Yucaipa - founded by LA based businessman Ronald W. Burkle - would make a run, but was concerned that some of the magazines he had recently bought from Primedia wouldn’t fit with the titles from Dennis.  According to MediaWeek:

A factor in the outcome was that the other bidder, supermarket mogul Ron Burkle’s Yucaipa Cos., was concerned that the Dennis titles wouldn’t be a strategic fit with the enthusiast magazines it just bought from Primedia. 

To put things into perspective and connect the dots, Primedia’s stable of specialty magazines Enthusiast Media were recently sold for a whopping $1.2B to Sourcelink.  First off, what’s Sourcelink?  According to MediaWeek:

Also contending is supermarket mogul Ron Burkle’s Yucaipa Cos., which just paid $1.2 billion for Primedia’s enthusiast titles through Source Interlink Cos., a media distributor and marketer it controls; there are also unconfirmed rumors of a third player.

Quadrangle, on the other hand, is hungry to do a deal, having looked at Time Inc.’s enthusiast and parenting titles and Primedia but walked away empty-handed. (The Time Inc. properties went to Sweden’s Bonnier Corp.) Media observers also noted Brownridge would enjoy facing off against his former employer in the competition for the male audience.

Now that we know the connection, according to TheStreet.com:

The all-cash deal — which is valued at nearly twice Primedia’s current market capitalization — includes more than 70 magazine titles and 90 Web sites.

As a side note, for Allen to fetch anything north of $200M (rumors peg the final price tag at $235M) for 3 magazines speaks volumes about its prowess and Dennis’ franchise and brand equity. 

After all, Primedia sold 70 magazines and 90 websites for $1.2B.  TheStreet.com continued:

For Source Interlink, a provider of marketing and entertainment products, the deal is expected to boost its revenue to roughly $2.4 billion on an annualized basis. The company, whose market cap stands at about $355 million, had revenue of $1.9 billion for the fiscal year ended Jan. 31.

What does that say about the landscape for print?  New revenues of $2.4B - market cap of $355M (as a Web guy, that is backwards). 

“Our review of strategic alternatives is complete and our direction is clear,” said Source Interlink Chairman Michael Duckworth in a statement. “Over the last several years Source has driven the consolidation of a fragmented and inefficient channel for the distribution and merchandising of home entertainment content at retail and the newsstand. This acquisition is a first step to leverage what we have built by transforming Source into a fully integrated media company with both print and digital content.”

Ah yes, Digital Content.  We’ve argued that in the 21st century, in an era of open-source software and ad-supported software, digital content is the new software: as distribution takes off, incremental revenue is practically all profit.

Sourcelink at least sees that digital content has to play a major role.  I’m not sure what Mr. Brownridge’s strategy is for Maxim, Blender and Stuff but if it’s more of the same, then all I can say is caveat emptor.  Of course, there’s nothing to suggest that this is the case, but for him to pit this acquisition as another chance for him to take on Wenner for the male audience, that is indeed insane.  We respectfully think that Brownridge should view this as a battle for digital supremacy online.  In other words, how can Blender, Stuff and Maxim be positioned to compete and win online. 

On my end, if only I would have known… then I could say carpe diem.

May 27th 2007 marked the 2 year anniversary - and expiration - of my non-compete to compete in the online men’s magazine space. 

Of course, I’m quite happy building a world-class digital media, technology and services company with a considerable leadership position in online video for broadband platforms… via WatchMojo.com.

But, the fact remains that much like Mr. Brownridge, nothing would make me happier to defeat my erstwhile partners in men’s online publishing… if I wanted to enter the space that is.

I wonder: Had I known that Dennis magazines - and all of those advertising relationships, writers, etc. - could be bought for as little as $235M, would I have leveraged Mojo Supreme’s assets - the search technology, the massive video library, the matching/classifieds applications, the blog network and media properties - raised $250M or so and make a run for Dennis myself?

I guess we all let our past grudges drive our decisions… but I’d make sure that my decisions were also economically sound and the best way for Quadrangle to maximize value is by looking at the glass as half full: how can Dennis adapt, evolve and forge ahead in an increasingly digital landscape?

I’m sure as lines between readership profiles and demographics continue to blur in a context is king online landscape, we’ll find out who the victors are and where the spoils shall go.

Of course, if I really had $250M, would I spend it on Dennis?   Probably not.  Lord knows I could do much more with that kind of money (guess what percentage of $250M our investment in the company thus far represents?), and if I were driven to get back at my backstabbing partners, there are better ways…

But thinking about it sure does make me think of the countless possibilities out there…

As per the Dennis sale, looks like it’s pretty much about to be announced: Brownridge-led Quadrangle bid for $235M.  Which at the $30-40M profit figure imply a paltry 7 times profits.   

My next post, coming tomorrow: “If I had a billion dollars…”