Bryant Urstadt
07/01/2005
Steve Bernstein was a managing director at Citigroup in 2000 when he purchased Relix, an underground music magazine that began its life in 1974 as a staple-bound newsletter for Grateful Dead concert-tape traders. By the time Bernstein came along, the magazine had evolved to cover an assortment of improvisational jam bands like the Dead and Phish—those that rarely appear on the charts but draw hordes of fans to concerts and festivals. A follower of the music himself—he plays the guitar and mandolin—Bernstein saw both a chance to become more involved in something he loved and an opportunity to expand an established brand. He hired an investment banker, called the magazine’s owners and made an offer.
Bernstein, a youthful 44-year-old, used to work in Midtown
Manhattan, spending 18-hour days coordinating disaster plans for Citigroup’s
270,000 employees. He now devotes all his time to Relix, and shares office space
with a staff of 12 in Soho. Posters of Jerry Garcia line the walls; musicians
frequently stop by to showcase their talents. Bernstein’s efforts to bring the
magazine to a wider audience have been successful. He has seen Relix circulation
jump from 8,000 to 110,000, with 83,000 subscribers, on his watch.Bernstein will not reveal what he paid for the magazine, but he boasts one of the rare success stories in the annals of media passion investments. “Stop, look, listen and educate yourself before you make your move,” warns Robert Garrett, president of AdMedia Partners, a New York investment bank that specializes in media acquisitions. The difficulties of running a publication as a business, while producing quality editorial material, often come as a shock to newcomers. The risk-averse and thin-skinned make poor candidates for media mogulship. Profits are elusive; publications, particularly newspapers, are often money pits.
| VALUE JUDGMENT Buying a newspaper or magazine can be an alluring proposition for investors who want to shape public attitudes or build a community of like-minded enthusiasts. But media companies can be financial black holes. The newspaper business is mired in a long-term commercial malaise, and popular magazines are often commanding prices far above their intrinsic value. |
Printed in Red
Would-be Horace Greeleys may find newspapers alluring, but most investors avoid them altogether. They incur daunting costs—dailies are expensive to print and circulate, and require large editorial staffs. The potential advertising base and readership of most cities is only large enough to support one daily newspaper. Michael Steinhardt and Roger Hertog, both Wall Street money managers, have poured millions into the New York Sun, a paper aimed at what the editor terms “the right wing of the Democratic party.” Since its launch in 2002, it has grown to roughly 40,000 readers—barely a blip on the radar screen for the New York Times and its 1.1-million circulation. Hertog concedes that he expects the paper to require a total investment of up to $25 million to achieve profitability.
In 1975, David Mitchell bought the Point
Reyes Light, a local newspaper in Point Reyes Station, Calif., for $37,500. Four
years later the paper won a Pulitzer Prize for reporting on a cult operating in
Marshall, six miles to the north. Unfortunately, he found that you cannot eat
prestige; the paper has since endured 25 years of commercial struggle. The Light
was highly respected, but rarely in the black, drawing year after year on money
Mitchell inherited from his father. Now in his 60s, he has finally run through
that inheritance. When a reporter from the San Francisco Weekly visited Mitchell
in December, he found him rushing home to get his checkbook. The paper’s bank
account was overdrawn again, and Mitchell’s dwindling personal funds were the
paper’s last redoubt.Niche Hunters
There were 18,821 consumer magazines published in North America in 2004, according to Oxbridge Communications’ National Directory of Magazines. There were more than 1,500 new titles in 2003 alone, according to the Directory’s figures. This growth most likely reflects the improvement in the overall economy and, therefore, better advertising revenue prospects and publishers’ access to financing for new titles.
Specialist magazines such as Relix, that have a narrow but clearly defined audience, have the best chance of becoming steady earners. Indeed, most new launches have a fairly well-defined ambit, as the chart on the next page illustrates.
In 1997, consultant David
Bradley purchased the National Journal, a nonpartisan magazine catering to
Washington insiders, that publishes advance notice of FCC hearings and first
looks at the FDA docket. It is too specialized for widespread consumption, but
many inside-the-Beltway readers find it indispensable. “The Journal is stable
and successful,” Bradley claims. Though he refuses to reveal exactly how
successful, he says that it “grows handsomely.”
Publications will have to
grow handsomely indeed if they are to justify valuations sellers are currently
demanding. According to the mergers and acquisitions trade publication The Deal,
the recent high-priced acquisitions of media groups such as Thomson Media and
Network Communications have pushed the expectations of sellers up significantly,
making it difficult to find properties at reasonable prices. The Deal reports
that in two recent auctions, sellers wanted 15 times earnings before interest,
taxes, depreciation and amortization (EBITDA), while buyers did not want to bid
above 12 times. In fact, even this bid is significantly higher than traditional
levels—say, eight to 10 times EBITDA. Banks are facilitating higher valuations
by offering to lend buyers a greater multiple of EBITDA for these transactions
than in the past.
Because of the number of well-financed, interested buyers
currently seeking media properties, those who bid for properties at auction are
almost certainly doomed to pay top dollar. Media M&A specialists say
strategies like Bernstein’s—approaching an owner privately and negotiating a
bilateral deal—usually result in a much better outcome for the buyer than
bidding in an auction.
Another option is to begin with a clean slate.
Investors looking to exploit an underserved niche in the print media often
consider starting their own magazine. In 1981, David Bunnell decided to launch a
magazine devoted exclusively to a product just released by IBM: the personal
computer. Today PC Magazine claims 5.1 million readers and, as the flagship of
Ziff Davis Media, commands more than $70,000 for a single full-page, four-color
ad. Bunnell, of course, is the exception. Even in today’s flush private equity
market, would-be publishers find it difficult to obtain start-up capital. “We
try not to get involved in start-ups,” Garrett admits. “It’s enormously
expensive. It’s enormously time-consuming. And it can be a great way to waste a
lot of money.” Reed Phillips of DeSilva & Phillips, a media investment bank
in New York, agrees. Phillips considers deals based on start-ups “as
infrequently as possible.”
Social Circles
Owners sometimes act as relatively silent partners, but
most find that their new projects absorb the lion’s share of their time. In
addition to the National Journal, Bradley purchased the Atlantic Monthly in 1999
for about $12 million. “I could spend less than a day a month on the
National Journal properties,” he says. “But I work full-time on the Atlantic.
I’ve had 250 meetings with advertisers alone. I have had hundreds of meetings
with writers and readers since I bought the magazine. I even write our ad
brochures. Doing it—and not even really succeeding at it—takes all of my
time.”
Mort Zuckerman purchased a majority stake in Fast Company in 1995 for
$20 million. The magazine became a boon for Zuckerman, making money along the
way leading to its sale to media giant Gruner + Jahr in 2000 for upward of $360
million. But Zuckerman has not enjoyed such luck with U.S. News & World
Report or the New York Daily News—nor the Atlantic Monthly, which he sold to
Bradley in 1999 after losing millions. Of course, Zuckerman’s publications
provide him with an invaluable entrée into both the Washington political scene
and New York social circles.
As an investment, the Atlantic Monthly is
costing Bradley an estimated $5 million a year. (In an attempt to shave costs,
he recently announced plans to move the magazine from Boston, its home for the
last century and a half, to Washington, D.C.) As a social feather in one’s cap,
however, the former editorial abode of Mark Twain and Henry David Thoreau is
priceless. “There are a few presumptions people seem to have about magazine
owners,” Bradley says, tongue in cheek. “There’s a presumption of intelligence
about the owner that goes deeply beyond the actual merits of the position.” He
admits, too, that other people seem to inflate his social prowess, as well. “But
I haven’t been invited to any special parties,” he points out. “Strangely, I did
get a Christmas card from Jimmy and Rosalyn Carter, although I’ve never met
them. I guess that was nice. The valets, though, certainly don’t deliver my car
any faster.”
Bryant Urstadt has written for Harper’s and the New York Times. urstadt@sbcglobal.net