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Investment banker and newsletter expert says, "we're in for more heavy weather".

It was just coincidence that the remnants of Hurricane Isidore were pelting the Northeast of the United States while we interviewed Citizens Bank investment banker Mark Young on the telephone, but the heavy rains pounding down outside his offices in Boston and ours in New York seemed a fitting backdrop to his assessment of the economy. "We're in for more heavy weather. I don't foresee any dramatic turnaround," said Young, who is also a member of The Newsletter on Newsletters' editorial advisory board.

"Back in May and June and early July, there was a market pickup in activity. All of a sudden across our whole portfolio--and that, of course, includes magazines and newspapers as well as newsletters--both our customers and prospects started new initiatives, recapitalizing their companies and making acquisitions.

"Our pipeline filled pretty quickly. And we either completed or are winding our way through the process of those deals begun in the first half of the summer.

"Since then, it has diminished dramatically. So, we had a period of activity followed by another lull. More recently, though, one of our relatively large newsletter customers came to us to help underwrite a very large marketing campaign (a direct mail campaign as opposed to telemarketing)," Young continued.

"They are hoping--and that is the word, hoping--to get a good response. I don't think they have any inside track on their market but they were just tired of doing nothing" Young said.

"We have another large newsletter publisher undergoing the recapitalization process, and there's been great interest on the part of investors and debt providers like ourselves."

Liquid and under-leveraged vs. illiquid and over-leveraged

After noting those two bright spots in the Citizens portfolio, Young said, "Basically right now, after the great M & A activity of 1998 to 2001, I see two types of companies in the newsletter industry, and I'm talking about the big companies:

* "Those who are liquid--that is, free of debt--and under-leveraged are in the catbird seat.

* "Those whose acquisitions were done with a large debt are in trouble. They are, if I may phrase it so, illiquid and over-leveraged. For many of them, their market is diminishing because of various reasons we all know, but their debt is not diminishing.

"For example, two large newsletter publishers both sold their companies at handsome prices and remained with them. In fact, one reason they got high prices was that the acquiring companies valued their management skills. They're both very hard-working honest, honorable people, but what's happened to them since--and they both used virtually the same phase-- 'has been a very humbling experience.'

"Another large company, which we all know but I cannot name, went to sell itself in the market and the market said, 'You're not worth what you're asking.'

"This is very different from the period of 1992-1994, when purchase price multiples came down to four to six times cash flow, with problem properties at two to three times multiples.

"Now I'm seeing high single digit multiples--8 to 10 times cash flow--and all I can say is, the math doesn't work.

"These multiples have stayed relatively high, but I'm sure gravity will soon settle in.

"I see some big properties that will either fold or will be sold at more reasonable, market-determined prices."

Designated driver

"That said, I want to emphasize that people are now valuing our constituency," Young said, referring to newsletter properties. "During the gold rush of M & A activity from 1998 to 2001 we were like the designated driver--everyone was partying except us. Now that the party is over, the market has moved back to us.

"There is availability of equity capital. People have cash to spend and have identified business newsletters as a niche to invest in. We continue to be contacted almost as much as ever. The market is not dead. People are trying."

Young, however, concluded our interview with this sobering observation: "We're in for some more heavy weather. People are saying that we're at the beginning of the end. But I say we're at the end of the beginning."

53 State St., 8th Fl., MSB 880, Boston, MA 02109, 617-994-7045, www.citizensbank.com
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Publication:The Newsletter on Newsletters
Date:Oct 3, 2002
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