Primedia PRM
April 28, 2003 - 7:51am EST by
rylflush803
2003 2004
Price: 2.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 674 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

PRIMEDIA (PRM) is an extremely attractive investment due to a combination of factors including its current valuation, negative Wall St. sentiment, a motivated, highly-connected large shareholder (KKR), high short interest and near term catalysts. PRM has literally been “left for dead” by investors and Wall St. due to the economic downturn’s affect on media companies, its high debt load ($1.7B) and poor management decisions over the last 3 years under ex-CEO Thomas Rogers to invest in the internet at the peak of the bubble. PRM is also a cheap way to play a recovery in the media and advertising market.

Current Price: $2.60 / Market Capitalization: $674MM / Equity Value: $3B

Valuation:
A DCF of the business puts its value at around $6. PRM is also attractive on EBITDA multiples trading at 11x 2003 EBITDA and 10x 2004 EBITDA (projections from Morgan Stanley – 2/13/2003). PRM’s assets are worth closer to $5 according to Merrill Lynch sum of the parts analysis (2/13/03).

Sentiment:
Wall St. couldn’t be much more negative on the company as Morgan Stanley, CSFB and Bear Stearns all rate it Underperform while Merrill Lynch rates it Neutral. The negative sentiment is due to the lack of clarity on the direction of the company, which should improve in the near-term, especially with a new-CEO.

Motivated Shareholder:
Kohlberg, Kravis and Roberts (KKR), led by Henry Kravis, owns 60% of the company and is extremely interested in unlocking value from the business. Four of PRM’s 12 Board members are KKR executives. KKR’s connections should allow PRM to find buyers for further divestitures (similar to the recent sale of Seventeen to Hearst for $182MM) or possibly the entire company.

Management Changes:
A new CEO will be named in the near term since the firing of Thomas Rogers on 4/17/03. The new CEO most likely will be chosen with direction from KKR which means the new CEO will continue plan on cost cutting, asset sales and most importantly – getting the lagging stock price up.

Recent Financial Performance Improvements:
Recent financial performance at PRM has been improving. In Q4 2002, PRM’s EBITDA was up 63% to $95.7MM. On 4/17/03, PRM reaffirmed its prior Q1EBITDA and 2003 EBITDA guidance of up 20% and up high single digits. PRM expects to be cash flow positive in 2003.

High Short Interest:
On a float of 92.5MM shares, 6.75MM (7%) are short which would result in a short-squeeze if improvements continue as this short interest would take 13 days to cover based on Bloomberg’s short interest page (PRM Equity SI). The short interest is closer to 9% if you exclude shares held by KKR.

Debt:
While high leverage is never a positive, PRM’s debt is manageable and is being reduced. The bonds have rallied from 75 in October 2002 to par currently.

Description:
PRM is a leader in the media industry with its combination of traditional and new media properties. The company capitalizes on its focused content across print, television, the Internet and live events to offer highly effective integrated advertising and marketing solutions in some of the most sought after advertising demographic sectors including teens, automotive, outdoor, luxury, real estate and business-to-business segments. With 2002 sales from continuing businesses of $1.6 billion, PRIMEDIA is the #1 special interest magazine publisher in the U.S., producing more advertising and editorial pages through its more than 250 titles including Automobile, Motor Trend, New York, Fly Fisherman, Power & Motoryacht, Telephony, Ward's Auto World and American Demographics, than any other media company. It is also the #1 producer/distributor of specialty video with 18 satellite and digital video product lines, including Channel One Network; and the #1 news and information group on the Internet, led by About.com.

Investment Highlights:
* PRMs owns magazines that are the best in their niche market.
* In 2002, over half of the specialty consumer magazines were number one in their markets.
* Liquidity risk has been mitigated as next big debt maturity is not until 2006
* Attractive free cash flow yields of 8% in 2003 (hurt by cash payments of $25 mm due to restructuring), 14% in 2004 and 17% in 2005
* PRM has $1.7B in NOLs and is not expected to pay taxes until 2011 under current projections (estimated value of $447MM to $536MM at a 7-10% discount rate)
* PRM is actively purchasing debt on the open market
* PRM purchased $72.7MM in Senior Notes during the fourth quarter for $64.4 mm
* PRM’s Board has authorized the company to spend up to $90MM for the purchase of Senior Notes ($26MM remaining)
* PRM was actively exchanging the preferred stock for equity in 2002
* In 4Q02, exchanged $82MM of exchangeable preferred stock for 17.2MM shares (value between $22MM - $58MM based on stock’s low and high in the fourth quarter). PRM’s Board authorized exchange of up to $165MM ($85MM remaining)

PRM reports under two segments: Consumer and Business-to-Business

Consumer Segment (84% of EBITDA):

Consumer Magazines and Media Group:
One of the largest specialty consumer magazine companies in the U.S., with over 125 titles including: American Trucker, Automobile, Crafts, Fly Fisherman, Guns & Ammo, Hot Rod, Hunting, Motor Trend, Motorcyclist, Power & Motoryacht , New York, Sail and Soap Opera Digest.

Consumer Guides:
The largest publisher of rental apartment guides in the U.S. with 88 local versions, most of which are distributed monthly and provide informational listings about featured apartment communities. The average number of monthly visitors to the Company's Internet site, apartmentguide.com, grew to approximately 1,230,000 per month in 2002. Rental leads delivered to apartment advertisers were up approximately 99%, from approximately 2,260,000 in 2001 to approximately 4,500,000 in 2002.

Primedia Television:
Channel One Network’s news program, Channel One News, is the only daily, advertising supported television news program delivered to secondary school students in their classrooms. Broadcasts every school day via satellite to approximately 8.1 million students, 360,000 classrooms and approximately 400,000 educators in approximately 12,000 secondary schools in the United States.
Films for the Humanities and Sciences is a distributor of approximately 2,250 owned and 9,600 licensed educational videos, DVDs, CD-ROMs and related products.
Primedia Digital Video develops, produces and distributes video properties based on the Company's brands and franchises, and recently launched the Video Magazine Rack, a video-on-demand cable TV service offering a selection of video content related to the PRM's print production

About.com:
Leading producer of information and original content on the Internet. The About and Primedia sites combined were the 5th most visited sites on the Internet in December 2002 with over 44 million unique visitors, as measured by Media Metrix. About's auction-based classified advertising business, Sprinks, enables an advertiser to bid for link placement on targeted content web pages, search results and email newsletters on the About Network and on Sprinks affiliate sites

Business to Business Segment (16% of EBITDA):

Business Magazines and Media Group:
Publisher of business-to-business magazines in the U.S. with over 65 titles that provide information to professionals in such fields as communications, agriculture, broadband, transportation, industrial, professional services and entertainment
Workplace Learning:
Primedia Workplace Learning provides integrated training, education and information solutions to public and private enterprises

CEO and Chairman Thomas Rogers’ Resignation:
On 4/17/03, PRM announced the resignation of Tom Rogers as Chairman and CEO, citing differences with the Board in opinions regarding the future direction of the company. Charlie McCurdy, formerly President of PRM and a founder of the company, has been named interim CEO. Dean Nelson, CEO of Capstone Consulting, a consulting firm that works exclusively with KKR (majority shareholder of PRM) portfolio company, was named interim Chairman. A search for a permanent CEO has been initiated among both internal and external candidates. Thomas Rogers will be remembered for his aggressive push for multimedia growth at PRM and especially for his ill-conceived purchase of About.com for $700MM in November 2000 which end up being extremely dilutive for shareholders. The purchase was part of a broader strategy to expand PRM as a broad media company encompassing print, television and the internet.

With Rogers now gone, focus has been placed on his replacement and whether the new CEO will be more focused on a sale of the of PRM or really trying to turn the business around. While impossible to know for certain, the fact that Henry Kravis finally acknowledged the failure Tom Rogers to make PRM a multi-media powerhouse is indicative of Kravis’ motivation to focus on the sale of the business. Morgan Stanley analyst Douglas Arthur has suggested that Bob Burton, formerly the successful CEOs of both World Color and Moore Corp. (two large printing companies), is a likely successor. Burton is well-known to KKR and would bring instant credibility to PRM.

Recent Acquisitions and Divestitures:
* PRM recently sold Seventeen magazine to Hearst Corp. for $182MM. Deal is expected to close in Q2 2003.
* Divested American Baby Group ($115 mm), Chicago magazine ($35 mm), Modern Bride ($50 mm), ExitInfo ($24 mm), Horticulture, Doll Reader and In New York in 2002
* Acquired Emap in August 2001 ($532 mm)
* Acquired About in February 2001 ($700mm)

Discounted Cash Flow Analysis:
A simple DCF analysis of PRM gives a stock price closer to $6, over 100% higher than the current $2.60.

2003 – EBITDA: $277MM / CAPEX: -$40MM / Restructuring: - $25MM / FCF: $237MM
2004 – EBITDA: $296MM / CAPEX: -$45MM / Restructuring: - $5MM / FCF: $251MM
2005 – EBITDA: $314MM / CAPEX: -$46MM / Restructuring: - $5MM / FCF: $268MM
2006 – EBITDA: $334MM / CAPEX: -$48MM / Restructuring: - $5MM / FCF: $286MM
2007 – EBITDA: $354MM / CAPEX: -$49MM / Restructuring: - $5MM / FCF: $305MM
2008 – EBITDA: $375MM / CAPEX: -$51MM / Restructuring: - $5MM / FCF: $324MM
2009 – EBITDA: $396MM / CAPEX: -$52MM / Restructuring: $0MM / FCF: $344MM
2010 – EBITDA: $419MM / CAPEX: -$54MM / Restructuring: $0MM / FCF: $365MM
2011 – EBITDA: $443MM / CAPEX: -$55MM / Restructuring: $0MM / FCF: $387MM

Terminal EBITDA Multiple: 9x / Implied Perpetuity Growth 4% / WACC 12% - $4.90/sh
Terminal EBITDA Multiple: 10x / Implied Perpetuity Growth 4.5% / WACC 12% - $5.50/sh
Terminal EBITDA Multiple: 11x / Implied Perpetuity Growth 5% / WACC 12% - $6.12/sh
Terminal EBITDA Multiple: 12x / Implied Perpetuity Growth 5.5% / WACC 12% - $6.73/sh
(Note: WACC at 12% is midpoint of 10-14%)

Catalyst

* Will announce first quarter earnings on May 1st
* Potential purchase / exchange/ redemption of more debt / exchangeable preferred
* Sale of further assets including Channel One, the B2B group, portions of directories group and enthusiast magazine group
* Replacement of CEO
* Wall St. analysts (Bear Stearns, CSFB, Merrill Lynch and Morgan Stanley) gain more comfort with business strategy and upgrade it.
* A sale of the entire company
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