Description

Primedia is a targeted media company consisting of three business divisions - Enthusiast Media, Consumer Guides and Education. My case around Primedia is based on the fact that though the stock trades today at 9.1x ttm EBITDA, Enthusiast Media and Consumer Guides are businesses with different growth profiles and therefore deserve different multiples if valued separately. An investment in Primedia can result in upside of atleast 45% over the next two years based upon conservatively calculated values of these two businesses. Management intends to spin off the Consumer Guides business, which should serve to highlight the value of this segment.

 
Overview

Historically, Primedia was a broad based media enterprise consisting of a mélange of disparate assets resulting from a series of acquisitions. Starting 2000, PRM has been opportunistically divesting select businesses to position itself as a targeted media company. PRIMEDIA’s properties deliver content via print (magazines, books and directories), live events (trade and consumer shows), video, as well as the Internet and other marketing solutions in niche markets. We will go through each of its businesses to arrive at a sum of the parts valuation of the company.

Enthusiast Media Segment

Financials (in thousands) –

This segment derives revenues from consumer magazines, websites, events, licensing and merchandising. Enthusiast Media is the fourth largest overall producer of magazine advertising pages in the U.S., according to Media Industry Newsletter, February 13, 2006, and has leading market positions in the categories it serves. For 2005, this segment was responsible for 61% of revenues and 20% of Segment EBITDA Margin. Revenue breakdown within this segment for 2005 is as under –

Advertising – 56.4%

Circulation – 33.6%

Others (events, online websites, etc.) – 10%

Readers value Enthusiast Magazines for their targeted content. An example is Powder Magazine. A magazine targeted at the skier community, this magazine publishes articles and photographs about well-known ski destinations and skiers. It publishes annual reviews of skis as well as other ski related gear. The subscription cost of $10.97 a year basically covers the cost of postage. The company makes money by selling advertising to ski industry companies (meaning gear companies like Volkl, Rossignol, or ski resorts, etc.).

This segment is currently having to deal with an overall advertising environment that is softer than historical norms. The company is taking the following steps to deal with these issues –

i)                    Upgrade editorial and art content by hiring talent, incorporating redesigns as well as instituting tracking and discipline. As a result of these measures, the company was able to pass 24 redesigns impacting 25% of print revenue through Q3 2006.

ii)                   Build multiple online revenue streams that include transactions that connect buyer and seller and lead generation. In 2005, the company acquired two websites – Automotive.com and Equine.com to realize this strategy. Automotive.com is a market Leader in Online Lead Generation for Lead Retailers, Car Dealers, and Auto Manufacturers. Its 2005 revenue is more than 2x all of Enthusiasts other Auto sites. Similarly Equine.com is a market leader in Online Transactions of Horses and Equine Equipment. Its 2005 revenues are 6.5x all of Enthusiasts Advertising transactions. As a result of these acquisitions, Enthusiasts monthly visitors have grown 50% to 15+ million.

iii)                 Leverage dominance in the Male 18-34 market. Enthusiast reaches 40+ million readers in this segment. The next closest competitor, Time Inc., reaches less than 30 million.

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As a result of these actions, for the 9 months ended Sept 30^th, 2006, Enthusiast Media revenues increased 3.9% driven primarily by the acquisitions of the Automotive.com and Equine.com. As these websites ramp up, they have tremendous operating leverage potential for this business (the fixed cost of doing 100 transactions and 1000 transactions is the same).

Using 2005 EBITDA, this business should be worth at least 10x EBITDA. Why ? Because companies like Mcgraw-Hill and Meredith (which may not be exact comparisons) are currently being valued between 9-13x EBITDA. Also, if we look at valuations that Primedia has been getting for its other businesses (Prism sold for 11x EBITDA) and some other internet deal valuations (IGN at 13x EBITDA), 10x seems to be a conservative number. Especially considering the fact that there are moderate growth opportunities from Automotive.com and Equine.com.

At 10x 2005 EBITDA, this segment can be valued at $1.2 billion.

Consumer Guides Segment

Financials (in thousands) –

** Includes $19.5 million in one-time investments in Auto Guide and New Home Guide.

Consumer Guides is the leading publisher and distributor of free guides in the United States with Apartment Guide/ApartmentGuide.com, New Home Guide/ NewHomeGuide.com and Auto Guide/AutoGuide.com. Revenue is generated from two different revenue streams: (i) advertising supported print and online real estate and auto guides and (ii) distribution of Consumer Guide and third party publications (DistribuTech). For 2005, this segment was responsible for 32% of revenues and 24% of Segment EBITDA Margin. Revenue breakdown within this segment for 2005 was as under –

Advertising – 82.3%

Other (Distributech) – 17.7%

Distribution is Key Competitive Differentiator

Consumer guides distributes approximately 32 million print guides annually through its  proprietary distribution network: DistribuTech.

DistribuTech is the sole distributor of free publications in leading retail chains with more racks in retail locations than all of its competitors combined. In 2005, it had over 60,000 distribution locations consisting of leading grocery, convenience, video and drug stores, universities, military bases, major employers and other locations in 72 metropolitan areas.

Approximately one-third of these locations have exclusive distribution agreements with DistribuTech . The guides are typically displayed in free-standing, multi-pocket racks located in high visibility, high traffic locations at the entrance or exit of major retailers. DistribuTech  generates revenues by leasing rack pockets to other publications and providing warehousing and delivery distribution services to these publications. DistribuTech  competes for third-party publication distribution primarily on the basis of its prime retail locations and its service.

As a result, Consumer guides has been able to leverage this distribution network to not only provide high barriers to entry (and thus maintain market share) but also to introduce new guides into new markets (like Auto Guide and New Home Guide).

Apartment Guide -

Advertisers in Apartment Guide receive advertising in their local Apartment Guide magazine as well as a listing on ApartmentGuide.com. Most of Apartment Guide  publications are distributed monthly to retail locations where they are available free to the consumer. ApartmentGuide.com attracts approximately 1.3 million unique visitors per month and had 19,685 apartment property listings as of December 31, 2005. The website offers many premium features not provided by its print products including virtual tours and flexible search functionality.

Apartment Guide typically delivers 30% of a community’s leases (advertisers’ largest lease source). The value proposition of this is that the cost-per-lease to advertise is $225, significantly lower than almost all competitors. If rent is $1K/month and a tenant stays 18 months, $225 investment generates $18K for the apartment manager.

Through the Apartment Guide publications and Apartmentguide.com, the Company generated approximately  5 million leads for apartment property managers in 2005. The majority of Apartment Guide customers purchase 12-month contracts, and, in 2005, approximately 90% of contracts were renewed.

Apartment Guide has had to deal with challenging industry conditions due to high occupancy rates across over half of the markets along with a reduced advertiser base as a result of continued losses from condominium conversions. Despite this, in FY 2005, revenues were down only slightly and were down 5% for the nine months ended Sept 30^th, 2006. We can attribute this to brand leadership, both in print and online, in its category. Management does not feel that this market has bottomed out. But in the next one or two years, as this market bottoms, Apartment Guides revenues should stabilize or even grow slightly,.

Growth opportunities -

i) RentClicks.com - RentClicks.com is the largest online marketplace for small unit rental properties, which is the largest segment of the rental market. With low market penetration (less than 2% nationally), it represents a significant growth opportunity. It addresses 70% of the market not served by Apartment Guide (Apartment Guide  targets larger property owners (75+ units while RentClicks.com  targets small-unit owners—duplexes, condominiums, houses for rent, etc).. The Company acquired RentClicks.com in January 2006. RentClicks.com performed well in the nine months ended September 30, 2006, organically growing revenue 94% versus last year.

ii) Auto Guide and New Home Guide – Using DistribuTech’s network as leverage, Consumer Guides has been able to launch roll out Auto Guide and AutoGuide.com. Auto Guide markets an integrated program to auto dealers that advertise their pre-owned auto inventory in high quality local publications available free to consumers at leading local retailers as well as on the national Internet site AutoGuide.com . The Company believes that this market is greater than that of its core Apartment advertising market.

Similarly, the company has rolled out New Home Guide publications to provide informational listings about featured new home communities with the majority of advertising revenue contributed by builders and developers. Both of these represent significant growth opportunities (Auto Guide being 6% and New Home Guide being 18% of Consumer segment revenues).

Because of the growth opportunities in this segment, I value this at 11x EBITDA. Using 3 year average (2003-2005), this values the Consumer Segment at $951 million.

Education Segment –

Financials (in thousands) –

PRIMEDIA Education is comprised of Channel One, a proprietary network to secondary schools, Films Media Group, a leading source of educational videos available in multiple formats, and PRIMEDIA Healthcare, a continuing medical education business. For 2005, this segment was responsible for 7% of revenues and 11% of Segment EBITDA Margin. Revenue breakdown within this segment for 2005 was as under –

Advertising – 52%

Other (Films Media and Primedia Healthcare) – 48%

Channel One generates the majority of its revenue by selling two minutes of advertising shown during each 12-minute Channel One News daily newscast. Channel One News airs only during the school year, typically middle of August through early June. The company’s objective for Channel One is to broaden its revenue base, beyond traditional advertising to include, Corporate Sponsorship of Public Affair topics, that are relevant to teens. As a result, In 2005, Channel One gained major new sponsors, including Verizon and Subway. The 2006 results will benefit from significant cost cuts taken in late 2005 and early 2006. Both the Films Media group and Prime Media Healthcare had positive year-over-year revenue in segment EBITDA growth

In any case, this segment represents a small portion of the value, and it was cash flow positive in 2005. I expect this to be cash flow positive in 2005 as management continues with cost cutting. I value this segment at $0.

Other Points to consider –

i)                    The company has reduced Net Debt and preferred stock by $1.4 billion since September 30, 2001.

ii)                   Net debt at Sept 30^th, 2006 is $1.31 billion with the nearest significant maturity not until 2010

Valuation

Enthusiast Segment - $1.2 billion

Consumer Guides - $951 million

Education – 0

Net Debt - $1.31 billion (including capital leases)

Operating leases (capitalized) - $169.9 million

Stock options – 0 (since total at Sep 30^th, 2006 was 20,142,640 at WAP of $7.67 –  way out of the money since current stock price is $1.72).

Total = $671 million

Shares outstanding = 264 million

Implied value per share = $2.5

Note that the company has $1.2 billion in unused NOLs and we can do our own PV calculation for these. But I have not included them in the total.

Stock Ownership

Note KKR controls approximately 60% of this company.

Risks: -

1. My valuation is based upon EBITDA multiples. Since Debt value is so large, any change in these multiples can yield huge swings in implied equity value. I have used, what I feel are conservative multiples and not included NOLs also for the same reason.
2. KKR owns a huge portion of this company. I am not sure what their history is and if they have a propensity to screw outside shareholders.
3. The company has filed the Form 10 but there is no record date yet for the spinoff. If this does not materialize, the stock may forever languish at this price.

Catalyst