RBI and REC Under Profit Pressure

Reed Elsevier held its AGM last week. In summary, the management bragged that 80% of their profits came from the professional information business which, whilst not immune to the downturn is nevertheless pretty robust.

By contrast the marketing driven businesses, RBI and Reed Exhibitions are having a very rough time indeed. These are direct quotes from the Interim Management Statement;

Reed Exhibitions: Budget pressures on promotional expenditure are leading to reduced exhibition space sales and a decline in paying delegates at certain shows. Attendances are showing encouraging resilience. The revenue pressures, together with the net cycling out of biennial shows this year, will result in revenue decline and lower adjusted operated margin against an exceptional year in 2008. Of most significance to date are the reductions in size of events in the property and retail sectors. The cycling out of biennial shows will particularly affect first half comparisons.
Reed Business Information: Advertising markets are being significantly impacted by the global economic downturn across geographies and sectors. Subscriptions and other user revenues, which now account for over 50% of the business, remain relatively robust. In this difficult environment, the focus in RBI is on right sizing the cost base to match reduced revenue expectations. Adjusted operating margins will be lower, as the impact of the revenue decline can be mitigated only in part by the significant cost savings from restructuring and other cost actions.

The last sentence is interesting isn't it? Trading is so bad that not even the cost cuts can offset the decline. What if it turns out to be true, that this year is not the nadir of the downturn for business media, but the best year we are going to see fro some time to come. B2B blogger, Neil Thackray has argued that a new model is required if the industry is to escape from its current malaise. It looks like Reed Elsevier may be looking at hard financial evidence that he is right.

New Reed CEO Ian Smith will already be forming a view about what to do. The failed sale process means that even though the RBI business is small it will be an obvious boil on an otherwise alabaster skinned face. Until it is lanced it will ooze pus at every presentation to analysts.

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Business Media still constrained by legacy

We know now what the future for many business magazines will be. Many observers are surprised that the big behemoths of business media have not been more active in disposing of a tail of assets. As the business media offering gets more complicated most media companies are hunkering down around the markets where they think they will be best able to succeed, judging that competing to win in multiple markets is more difficult the more markets targeted.

When the sale of RBI was aborted it wasn't long before most of the titles in RBI USA were slated for sale. More than a year later the process is almost complete with an annoucnement just a few weeks ago that 22 titles had not been sold and would be closed. Since then a number have been sold to management. What might we conclude from this? An article in Folio magazine postulated that there was never any real effort to sell to trade buyers. Why? Well Reed might have judged that they had milked all the profit they could from these titles, but because of the contingent liabilities - especially redundancy costs, that the samll consideration they were likely to get would be wiped out when the buyers realised this. Better to threaten to close the titles and let the management take them away for a song and take their expensive contracts with them.

In the UK the liability problem is worse. It is possible that the likely value of many of the mags, once the liability issue has been netted off, is negative. Expect to see Reed hanging on to titles unitl the profit runs out and then selling them off one by one if the management teams can be persuaded to take them.

Many other business media companies have a similar problem. Values for magazines are low, and falling. Profits are still declining and there is little sign of a meaningful growth in print advertising. As Elvis used to say, we are all in a trap.

We started this blog four years ago urging comapnies to be braver else the world would get worse and worse for them. In july of that year we said,Are business media companies moving fast enough to adapt to this new world? The answer is no, but there is still time - just.


Most were not, so it has. Moving quickly to ceate th business you want to end up with remains thechallenge. The slow death strategy is demoralising for the business and worsens the prospect for a successful long term outcome. I just scared myself by reading this blogs archive posts from june and July 2006. Horribly prescient.

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Reed Elsevier Results and the dangling question over RBI

The Reed Elsevier results presented for the first time by a slightly nervous looking CEO contain some clues not only for the future of Reed but also the future of business media in general. At RBI revenues were down 18% and profits down 34%. The revenue fall was too great to catch up the margin with cost cuts. The exhibition business, a "late cycle" business according to the CEO, revenues were down 21%and profits down 31%. There have been rumours that Reed might consider selling REC, but there is no evidence for that.

REC is decribed as " a good business, well managed. It's just cyclical". As Reed freely admits it has little clue as to when the cycle will be up.

The strategy for RBI is simple and painful. Run it for value. (I thought all businesses did this for all assets), realign the cost base to lower rvenues (so cost cutting still a work in progress), grow the data services business (I wish I had thought of that) and make more asset disposals.

Its hardly radical and its a backfoot strategy forced on the business by the failed sale process, the rocky economic climate and the collapse in print advertising.

Interstingly no questions from the floor of the briefing about RBI which means the City has written it off.

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RBI Sells and Closes in the USA

RBI has told its emlpoyees in the USA that it is selling many of its controlled circulation titles and closing others. There will be job losses. I hear there were no bidders for the entire bundle of US assets that were identified for sale and most of the titles now being sold are either loss making or near to. RBI is keeping its Construction data business and Variety (both run by ex RBI UK managers).

A bloody and painful time. So what of the UK business? Nothing yet heard from new Reed Elsevier CEO but I would expect more pain there too as the full bite of the downturn grinds further into revenues

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RBI Profits Collapse

The scale of the horror of traditional business media is in sharp relief today. Reed Elsevier has produced great results largely because its subs based business is so robust - but the profits from RBI across the globe have fallen to £55m. The report in the FT says this is down from £90m but at the time of the proposed sale the talk was of profits of £150m.

If we valued RBI (Reed Business Information) on the same profit multiple as Centaur who gave a profit warning today, then its market value would be less than £200m! No wonder the sale deal couldn't get done.

Also announced is a £112m restructuring programme for RBI. The current strike ballot over 35 redundancies in the UK is now in sharp relief. There is worse to come.

Let's hope the restructuring programme has some innovation in it as well as cost cutting. Reed says it has no plans to close any titles.

What will Reed do With RBI Now?

So that's it then. Reed Elsevier has "postponed" the sale of RBI for the "medium term". Since the disposal was announced last February the credit market has collapsed and so has the b2b media trading environment.

There has been no meaningful trade interest in RBI for months and now private equity buyers have proven to be very thin on the ground. The only deal on the table involved a deferred consideration and a low price. This would have left Reed exposed to a risk of not achieving even the depressed price the media has speculated. They wanted the cash from the sale to protect their credit rating and to pay down debt incurred following the acquisition of Choicepoint.

Reed will be kicking themselves that they did not get on with this disposal two years ago.

As the City digests the implications of this (even good international business media businesses are unsellable at almost any price) expect the pure play b2b public companies to endure a further beating on their share price.

What next for RBI? Clearly there is room for some substantial cost cutting. They should also be closing titles, downsizing the scale of the business and its overheads, re thinking how their magazine model works and run the place as if it were owned by private equity.

This will be very counter culture RBI management. They should plan that they have to exit their current shareholder in three years - just like a private equity manager would think. Exposing palpable shareholder value in such a short time period is not the same strategic approach as running a business as part of a long term position in a large corporate group.

The changes in thinking required are so fundamental that it would be wise to makes some management changes and to make them fast.

If I were Keith Jones (and for the record I am not), I would want to get such a plan written and in place before Ian Smith, the new Reed Elsevier CEO turns up. If I hadn't, I might expect a short career as global RBI CEO.

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And then there were none

The Guardian reports that Reed Elsevier has abandoned the sale of RBI although it intends to sell in the medium term.

The consequences of this are significant for us all. I'll post tomorrow with thoughts.

Its a Bit of a Bain, but there is only one bidder left for RBI

The Telegraph reports that only Bain Capital remains in the bid process for RBI at a bid of around £680m - around half the original price. The article also speculates that the proposed deal involves an earn out (ie deferred consideration) and a lock in for key executives.

As gifted as they are, the radical surgery and rethink needed in RBI is not best solved by managers who have been there 25 years. Earn outs are always messy and Reed Elsevier will be reluctant to tie themselves into future consideration over which they have no control.

Bain will consider that either they will have got RBI on the cheap, or by the time the earn out kicks in, the financial markets will be looser and raising funds will less of an issue.

I have no idea whether he is involved in the deal, but a Bain Consulting senior guy is one Graham Elton who was briefly CEO of Miller Freeman UK (now CMPi/United Business Media).

The odds of the deal closing are getting longer. There is every possibility of a withdraw before Christmas.

Deal or no deal, vicious cost cutting will follow rapidly in the new year.

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Informa Going Down

After months of speculation, private equity interest in Informa has materialised at a rather lower value than shareholders would have hoped, acccording to this interesting analysis by Peter Kirwan.

The standard thinking is that Informa is a solid B2B stock. It is a business with scale, it is not very exposed to advertising, has lots of events and subsctiption based activity and is a well managed beast. Even with all that in its favour valuations are softening.

Readers of this blog will not be surprised then, when the value placed on RBI which is smaller than Informa, is exposed to the advertising cycle, has little events and subs based activity drops in the second round of bids.

Reed Bids Falling in Dutch Auction

It is being reported that last week,the first round bidders for RBI were given an opportunity to revise their bids, ahead of the formal second round. According to the report on Thomson Merger News bidders were given more information about trading after the first round bids had been submitted. The article claims that the revised bids are lower than those posted initially.

This is the first of several rounds of chipping. We have said all along that the price of £1.2b was always ambitious. As trading deteriorates this will run to value.

Second round bids will lilekly be lower still. Its turning into a bit of a dutch auction

RBI Deal Announced October

Dow Jones is reporting that RBI staff have been told to expect an announcement on who the buyer is during October. The article also quotes a senior Reed Elsevier source as saying that the criteria for selection of a buyer will be based on the creation of shareholder value.

I am sure this comes as no surprise, but that means the business will go to the highest bidder, not the bidder who comes up the nicest plan for the future.

Also, an announcment in October is likely to mean a completion in December - as we have said all along.

RBI First Round BIds Received

The Wall Street Journal reports that first round bids are in for RBI with most at or around the speculated price of £1.2b.

This doesn't mean much. In first rounds you always bid enough to get into the second round (what would be the point of making a non binding indicative offer at a level you know to be unacceptable to the seller?), and that was always £1.2b, and then bidders can see more detailed information and come to a more intelligent view ahead of the second round.

Reed has provided bidders with vendor due diligence as part of the plan to get the deal done fast (before trading starts to be materially affected by the downturn they must hope). Reed will be very keen to complete. One interested party suggested that as the negotiation progressed Reed could be prepared to soften the deal by leaving some equity in the mix. This will help any private equity bid that is strugggling, not with the price, but rather with the mechanics of putting this level of finance together.

So what will happen next. Second round bidders will review the more detailed information, will review latest trading, consider the acceptability of the vendor due diligence and then put in their second round bids or withdraw. I have no way of seeing the information, but you would have to be an optimist not to expect some evidence of trading weakness materialising since the Information Memorandum was prepared. It would be very surprising indeed if the final price reached £1.2b.

UBM and Informa flirt with Each Other

The Telegraph and others report that UBM and Informa are in talks about a merger, which would create a very big thing indeed. The question that needs to be answered though is whether being a very big thing indeed is enough to make it worth doing.

Post acquisition integration work is normally badly done in these deals. Senior executives love the excitemtn of the deal but get bored with the detailed implementation. Costs come out, but the strategy upside somehow never sees the light of day.

The argument is that Informa is better placed post deal because its indebted balance sheet would no longer look quite so scary whilst for UBM it would reduce its exposure to advertsing revenues. All true of course, but strategy is much more than the maths of the deal if long term value is to be created.

How can the Informa conference expertise be implanted into the UBM publishing business? What is the plan for replcing the profits from dying magazines? (Paul Conley reports on more lay offs from UBM in the US). How will the new merged entity use its bigger muscle to accelerate growth in developing markets?

Some argue that all merger talk might provoke a private equity bid for Informa. This would be bad news for the RBI sale as Informa would be seen as a more attractive business. Perhaps Informa should merge with RBI. Now theres a a thought.

Easy Money for Private Equity in Business Media

The Times has been reporting that private equity is circling Informa. As a result the share price jumped. The speculation is that Informa could be merged with UBM. No doubt somone in hedge funds made some money today but an interesting trend is developing. Emap Business is now in private equity hands, so is TES, so is Incisive, so will be Reed Business Information. Now we are told that the same could happen for UBM and Informa. What is it that private equity investors see in business media companies that the City doesn't in the same companies on the public market?

Two theories. Either the PEs are mad or they see lumbering companies with heavy management costs and too little innovation. Running a PE backed company is a very focussed job. The CEO and the management know they have to drive shareholder value in a predicatable time period (3 to 7 years). In a public company most executives are working to not be fired, not take too many risks, not make a mistake, never see the consequences of their mistakes. PE is oft criticised for their slash and burn approach, but there are few media PE deals that have gone horribly wrong in business media.

Get the right management (not necesarily the incumbent) and there is still value to be extracted. Incumbent management take note, as the man from Hanley Wood said, you risk as being, perceived, perhaps rightly, as not competent to take our industry forward.

To Be Sold or Not to Be Sold. In B2B that is the Question

Peter Kirwan thinks Bernard Gray was beeing "cheeky" in postulating that RBI might not get sold. Grays business, TES, is backed by Charterhouse, one of the supposed bidders and therefore Gray is simply talking down the price in the interests of his owners he argues.

Maybe. The piece goes on to expose the opportunities for a buyer which are interesting. He rightly argues that there is plenty of cost to take out. Certainly most PE owners would consider that RBI has too much management rather than too little. But firing the COO would cost at least half a million alone!

The article also points out that the absence of trade shows creates an opportunity for a new owner to launch some. I think this is less compelling. Firstly the trade show market is very crowded and it is not easy to find new niches of any scale. Secondly although Reed Elsevier owns Reed Exhibitions this has ever prevented RBI from lanuching and running shows and conferences. It fact it does run some. It owns Salon International and SED for example.

In many of its core b2b markets REC owns the leading show- Hotelympia in the catering sector for example) so I would presume that Reed would require some kind of restrictive covenant on competing from a new owner of RBI.

As we have said before the problem for Reed is that the magazine business is unattractive and the liabilities on employment contracts and pensions are onerous. Gray may or may not be being disingenous, but he is right to say a deal is by no means certain.

Journalists Paid for Porn?

Apparently RBI has considered whether to pay journalists for the number of page views they generate. I think thats a great idea. They'll all start posting porn and pictures of Paris Hilton all over their b2b websites. That should brighten them up a bit.