Gearing down: Primedia selling off last magazine titles to focus on consumer guides.

PRIMEDIA Inc., at one time one of the largest glossy magazine publishers in the nation, may exit the business if it succeeds in selling off its last 70 titles.

Nineteen of the magazines are editorially based in Los Angeles, including Hot Rod, Motorcyclist, Car Craft and Lowrider.

Although the company declined to discuss how many employees the divestiture would affect, its largest single facility is the Los Angeles office. Primedia occupies 207,469 square feet in the former Petersen Publishing Co. building at 6420 Wilshire Blvd.

"The titles will be sold as a group," said Primedia spokeswoman Amanda Cheslock. "The company is looking at closing on a possible sale by the end of the second quarter 2007."

The company has received more than 60 requests for information and preliminary bid offers were due March 16. Based on recent M&A activity, the buyer will likely be financial rather than strategic since the big publishers--including Time Warner Inc. and Hachette Filipacchi Media U.S. Inc.--have shed titles rather than acquired them.

Primedia of New York has retained Goldman Sachs Group Inc. and Lehman Bros. Holdings Inc. to handle the sale. At current multiples, Deutsche Bank analyst Paul Ginocchio estimates Primedia Enthusiast Media, or PEM, should fetch about $1 billion. "The company will apply the proceeds from the sale to pay down debt," according to Chairman Don Nelson.

For Primedia, the sale of its PEM group represents both a continuation of a long-term divestiture strategy and a new beginning. In the last five years, the company has sold off more than $1 billion in media assets. In the process, it has lost such high-profile brands as Modern Bride (sold for $52 million to Conde Nast in 2(102), Seventeen and Teen (bought by Hearst Corp. for $182 million in 2003) and the Web site About.com (acquired by New York Times Co. for $410 million in 2005). Also, the company has sold off entire groups of magazines focused on media, outdoor sports, gems, crafts and history.

But with the PEM group, the company will sell the last of its crown jewels. PEM had revenues of $525 million in 2006, accounting for 62 percent of Primedia's total revenues of $849 million.

The company's long-languishing stock has revived with the prospect of a PEM sale. On Feb. 8, the day before announcement of the sale, Primedia shares closed at $1.65. Less than three weeks later it hit a high of $2.60 on Feb. 26.

The price has since settled back to trading in the $2.50 range. None of the three analysts who currently follow Primedia advocate buying shares.

In the report issued Feb. 27, Deutsche Bank's Ginocchio emphasized the importance of PEM, placing the possibility of a non-sale at the top of his list for risk factors. "Primedia is highly leveraged at 7.6 times fiscal year 2006 debt-to-EBITDA," the report states. "If there is an ad turndown or competition increases, and Primedia is unable to sell its Enthusiast Media division, Primedia may not be able to service its debt."

Potential buyers also face risk, particularly in regard to the auto rides, many of which ale L.A.-based and formerly belonged to Petersen. With the auto industry in a severe downturn, marketing budgets are shrinking; General Motors alone cut its ad spending almost 24 percent last year, according to TNS Media.

Domestic auto manufacturers account for 5 percent of ad revenues at Primedia's auto titles; foreign makers add another 8 percent. "If they shift ad money away from magazines, particularly Primedia's titles, earnings and cash flow will suffer," warned the Deutsche Bank report.

Overall, the PEM division reported a decrease in ad revenue of $4.1 million in 2006 and a circulation revenue drop of $404,000. Despite the downbeat market in print advertising, Primedia hopes buyers will look at the 90 Web sites and 65 events that come with the package.

Future of freebies

After the sale, Primedia will become a company focused on its other operating division, Consumer Guides, which publishes free Apartment Guides, New Home Guides and Auto Guides. These consist of free publications, usually distributed in supermarkets and convenience stores.

Assuming a full sale of PEM, an Apartment Guide and an Auto Guide will be the only Primedia presence in the Southern California media market by year's end.

The new Primedia would be a much smaller company carrying a smaller debt load. Based on the Consumer Guides segment's 2006 reported revenues of $325 million, Ginocchio calculates a post-sale debt-to-earning ratio of 1.1. The company would have a market value of 8.3 times its estimated 2007 earnings before interest, taxes, depreciation and amortization. "Based on its classified revenue exposure, we think it will trade in-line with the newspaper sector at 8.8 times," said Ginocchio.

While the divestiture of its L.A. rides will take Primedia away from the cyclical auto business, it makes classified advertising the sole source of company revenue. Moreover, the real estate markets offer no shelter from risk. In its 2006 annual report, released March 13, the company said that "high levels of condominium conversions, coupled with lower mortgage rates, have spurred housing purchases and limited existing and potential customers for Apartment Guide markets, while some markets experienced decreased vacancy rams and lower advertising spending."