Old-Media Plays Still Hold Appeal

With the credit crisis continuing to unfold, buyout firms have become even more cautious about the idea of buying media properties slow to make the transition to the Internet age.

Yet a growing number of industry observers say that now is the time to selectively make a move. “A lot of investment is required in shifting to new media, but the opportunities there are worth it—there will be a return,” said media analyst Gordon Hodge of Thomas Weisel Partners.

“When you look at the pace that audiences and advertisers are migrating from offline to online,” added Peter Ezersky, a managing principal of media- and communications-focused Quadrangle Group LLC in New York, “you don’t have the luxury of waiting.”

The opportunities born of media’s march into the 21st century are varied. One of them is to gobble up properties being expelled by companies who are themselves focusing more attention on digital media. In late December, Oak Hill Capital Partners, which has offices in Menlo Park, New York and Stamford, Conn., took eight FOX-network-affiliated television stations off the hands of News Corp. for about $1.1 billion in cash.

The purchase lets Oak Hill add to its Local TV television platform created last January when it bought nine stations from the New York Times Company for $575 million. The sales let both News Corp. and New York Times Company gain freer rein before to pursue their ambitious and wide-ranging digital strategies.

Another approach is shaking up and transforming properties directly. It’s one that Quadrangle is taking with Alpha Media Group, the company formed when Quadrangle bought “lad” magazines Maxim, Blender, and Stuff from Dennis Publishing last July for roughly $240 million. It has since folded Stuff into Maxim, hired a new editor, and begun heavily investing in Maxim’s already popular Web site for men. The firm is also overseeing the creation of targeted advertising plans across the company’s properties, particularly online. Said Ezersky: “We don’t have illusions that the consumer magazine business is a rocket ship of growth, but it’s a pretty stable industry with a lot of room to grow in terms of ad dollars.”

A third area of opportunity lies in those rare sub-sectors that remain immune to the technological shifts rocking the media universe. Veronis Suhler Stevenson, a New York-based mid-market buyout manager that specializes in media, is right now intrigued with the outdoor advertising business, in part for this reason. “It’s growing quickly because billboards are in limited supply,” said VSS managing director Jim Rutherford. It’s also protected from some digital trends. “You can’t Tivo a billboard,” Rutherford said.

VSS hasn’t pulled the trigger on a billboard company. But Thomas H. Lee Partners‘s and Bain Capital’s proposed $20 billion acquisition of Clear Channel—agreed to in November 2006 but not yet closed—marks an enormous vote of confidence in the business. Though Clear Channel is known best for having the largest radio network in the United States, roughly 40 percent of its revenue derives from Clear Channel Outdoor, the world’s biggest outdoor ad company, with nearly 100,000 displays in more than 60 countries, according to the company.

That people can’t escape viewing billboards alongside streets and clogged roadways isn’t lost on buyout firms. Nor is the fact that billboards are going digital. The transition has been accounting for roughly half “of the 6 to 7 percent growth [rate] of the billboard business in recent years,” said Hodge of Thomas Weisel Partners. Indeed, a growing number of billboards even feature embedded computer chips that let passengers with Web browsers on their cell phones receive more information about the products advertised. “That novelty and flexibility is very attractive,” Hodge added.

Similarly, said Hodge, companies like Colorado-based National CineMedia, which sells theater advertisements and previews on more than 14,000 movie screens across the country, have proven to be good investments. The company went public last February. “You don’t have the distraction of online, and brand recall is much higher than with television.”

Of course, old media companies have not made the easiest of turnaround targets. For starters, they often have unions fighting on behalf of massive workforces. Many areas of old media, including magazines, newspapers, radio and television, are also seeing their top-line growth decline. And today’s credit crisis is making the task harder than ever. Laura Martin, a senior media analyst at Soleil Securities Group, said not to “expect any new deals in the media space until the credit market stabilizes.”

On the other hand, there are still plenty of businesses out there with high-margins, stable cash flows and operating leverage thanks to brands that consumers know and love. And there is tons of upside potential, particularly for those able to cultivate deft online strategies. According to the Internet Advertising Bureau and PricewaterhouseCoopers, Internet ad revenues for the first nine months of 2007 totaled $15.2 billion, up 26 percent over same period last year.

“It’s challenging for public companies to transition to digital [since] they have quarterly earnings expectations to meet,” said Quadrangle’s Ezersky. After going private, he said, they “don’t have to worry about near-term quarterly results. They just have to be willing to spend the money, to have the conviction that they’ll come out with a bigger, better, stronger business.”