The good times are returning for business and professional information publishers, and company valuations have been rising. But what is the formula for maximising a publishing business's value?
LongAcre Partners has advised on a variety of mergers and acquisitions recently, so I was asked to outline our assessment of the market at the international FIPP conference hosted by the PPA's business and professional division.
As well as advising on financial conditions, I was able to tell them that informed and dispassionate journalistic comment plays a vital role too.
The trends in consumer publishing markets that have driven mergers and acquisitions are apparent in business publishing: audience fragmentation and the cannibalisation of offline revenues by online. As a result, publishers are wrestling with new challenges.
Despite mid-term challenges, the environment is uniquely favourable.
Emerging economies in Russia, India, China and Latin America present significant growth opportunities. At the same time, debt and equity capital markets are favourable. Indeed, on a recent European publishing transaction, debt providers were willing to provide a debt package of 10 times the EBITDA (earnings before interest, tax, depreciation and amortisation) — a new high watermark. EBITDA is often used as a proxy for the operating cash flow generated by a business.
There are three fundamental drivers of value that we believe are critical to information publishers today:
■ A presence in high-growth markets such as healthcare or technology.
■ The provision of business data, as complex and opaque market values (for example, in energy) have attracted strong growth and high valuation.
■ A scalable business platform with a common architecture that can be rolled out internationally.
The first diagram above shows the value of a basket of large, international professional and business publishers, measured as their year-end enterprise value (the company's stock market value plus net debt) divided by the previous year's EBITDA. The median valuation over this 15-year period was 10.8 times the EBITDA; this compares with a figure of about 10 for consumer periodical publishers.
Values peaked with the boom of late 1999/early 2000 at 14.7 times EBITDA.
In 2005 we saw a sharp acceleration in valuations once again, but what is different about this growth is that it is justified by strong underlying financial performance. Current median public market values, at 12.7 times EBITDA, are 17.5 per cent above the 15-year median. Whether this is a persistent change in the valuation landscape is hard to determine, but it is certainly very favourable for investment.
The second diagram looks at the link between valuation and profit growth.
The vertical axis shows the enterprise value to EBITDA ratio of a number of companies. The horizontal axis shows the expected compound growth in earnings between 2005 and 2007 according to broker forecasts. There is a correlation, but it's perhaps not as strong as you'd expect.
Clustered around 10 per cent compound EBITDA growth are UBM, Euromoney, Reed and Metal Bulletin.
Their valuations are clustered at 11.1- 12.9 times the 2006 EBITDA.
But look at Datamonitor, a business information publisher of must-have reference data. It benefits from compound growth of approximately 30 per cent with a rating justified by strong underlying performance. It is this business model — the delivery of critical data, often enriched by editorial and qualitative comment — which we consider to be a winning formula.
Merger and acquisition values for such properties have risen from a median of 12.5 times EBITDA in 2003 to 16 times EBITDA in 2005. We are aware of two current sales of database companies with likely valuation multiples of about 20 times EBITDA.
Online information providers are proving very successful. By contrast, the advertising-led publishing model has suffered from audience fragmentation.
Many publishers have simply republished print editorial content online, which we believe is not a sustainable value-creation strategy.
The implications for business development strategy of the move towards online publishing are extremely important.
High values are correlated with audiences in rapidly growing and/or valuable markets; and online delivery creates an unparalleled growth opportunity.
The valuation environment is currently robust and has returned close to 1999/2000 levels, though for different and more fundamentally justifiable reasons.
Probably as never before, focus and growth are being rewarded. Niche publishers need no longer be punished for their size, but can instead benefit if positioned correctly.
Eric Lawson Smith is managing director of the corporate finance advisory house LongAcre Partners