Valuation Guide: Magazine Publishing

|||Valuation Guide: Magazine Publishing

Valuation Guide: Magazine Publishing

Description of the Industry

The U.S. magazine and periodical industry (SIC 2721, NAICS 511120) includes general interest magazines, trade publications, and academic periodicals.  The magazine and periodical industry generates approximately $37 billion in revenue each year.[1]  Approximately 68% of this total is generated from sales and advertising in general interest periodicals, 17% is from financial, professional and academic periodicals, 1% is from publishing services for others, and the remaining 14% is derived from other products and services.

Although individual publishing companies have adapted to shifting market conditions with varying degrees of success, many agree that the print publishing industry as a whole is in decline. Even prior to the recession, readership was declining and publications were shutting down.[2]  Circulations of U.S. magazines over the past year have declined 0.1 percent, the combined effect of a 1.1 percent increase in paid subscriptions and a 9.6 percent decrease in single-copy sales.[3]  Over the past five years, annual revenue growth for the magazine and periodical industry has averaged –5.8 percent.[1]   Revenues are expected to increase only slightly in the near future as publishers expand into digital publishing and niche markets.[1]

The magazine publishing industry typically derives a lower percentage of its revenue from advertising and a greater percentage from circulation and subscription revenues, as compared to newspaper publishing.  Overall, about 45 percent of a magazine publisher’s revenue comes from the sale of advertising space.[4] Magazines are also considered to be more discretional purchases.  The discretionary nature of magazines hit the industry especially hard during the recession, as consumer expenditures declined.[2]

Concentration in the magazine publishing industry is low.  The top four firms in this industry account for approximately 20% of industry revenue.[2]  According to data from the Association of Magazine Media tracking U.S. magazine revenue for January through September 2012, the top ten consumer magazine titles generate approximately 25 percent of total industry revenue.[5]

Some of the major magazine publishing companies include:

  1. Time Warner, Inc.
    Time Warner’s subsidiary Time Inc. is the largest magazine publisher in the U.S.[6]  As of the end of 2011, Time Inc. published 21 magazines in the U.S., including Time, People, InStyle, and Sports Illustrated.[6]   In 2011, six of the top 25 magazines ranked by advertising revenue were published by Time Inc.[6] The company accounted for 21 percent of total U.S. advertising revenues in consumer magazines in 2011.[6]   Approximately half of Time Inc.’s revenues are generated from advertisement sales, predominantly from print magazines but also from websites and digital editions of magazines.[6]
  2. Reed Elsevier Group
    The Reed Business Information (RBI) division of Reed Elsevier provides data and information services, including magazines, in the U.S., Europe, Asia, and Australia.[7]  The leading RBI publications include Variety, New Scientist, and Elsevier.[7]   In 2011, RBI divested itself from several print magazine publications and increased its focus on web-based information services.7  RBI’s leading publications had stable revenues in 2011, with online revenues increasing as print advertising declined.[7]   The company’s other business magazines experienced a 5 percent decline in revenue, which RBI attributed to continuing weakness in the print advertising market.[7]
  3. Advance Publications
    Advance Publications is a private company that owns Condé Nast Publications, Parade Publications, Fairchild Publications, American City Business Journals, and the Golf Digest Companies in addition to its newspaper holdings.[8] Condé Nast publishes 18 consumer magazines and 4 business-to-business magazines as well as 27 websites and over 50 mobile and tablet applications.[9] Condé Nast’s magazine titles include Vogue, Wired, GQ, The New Yorker, and Vanity Fair.[10]  As of 2009, Advance Publications held 3.1% of the magazine publishing market.[2]

Industry Trends

Trends in the periodicals publishing industry have changed over the past several years, especially in response to shifts in technology. A few of the most significant changes are:

  1. The Internet is increasingly competitive with traditional print media.
    People are increasingly turning to the Internet as a media outlet, which has taken a toll on the publishing industry.  Consumers no longer want to wait for a monthly subscription to arrive so that they can access their entertainment and news media.  New media outlets such as blogs and Twitter also serve as alternate sources of content.  As readers increasingly turn to the Internet, so do advertisers, taking publishers’ revenue streams with them. Publishers that successfully adopt the Internet and new technology will fare better than those that do not.
  1. Magazines are cutting content.
    As the publishing industry experiences declining revenue, publishers are increasingly cutting content.  Magazines are becoming smaller and thinner as publishers no longer can generate the ad revenues necessary to sustain longer issues.  In recent years, many publishers have discontinued their less successful print titles.
  1. Magazine publishers are consolidating.
    Mergers and acquisitions are becoming increasingly common as publishers aim to achieve economies of scale and cut overhead costs through consolidation.[2] Additionally, the large investments necessary to develop digital publishing technologies have pushed firms to consolidate.  For example in 2005, Gruner & Jahr sold its Family Circle, Parents, Child and Fitness magazines to Meredith Corporation.[2]  In 2007, John Wiley & Sons, Inc. finalized the acquisition of Blackwell Publishing, a publisher of academic journals.[2]  Condé Net also acquired Ars Technica and SFO Media in 2008.[11] This trend is expected to continue, with publishers hoping to fend off competitors through consolidation.

Key Publishing Performance Metrics

The following are performance metrics that managers in the magazine industry use to benchmark their performance to others in the industry:

  1. Revenue per page
  2. Cost per page
  3. G&A/revenue
  4. Subscribership and circulation
  5. Renewal rate
  6. Market share
  7. Number of advertisers
  8. Number of pages

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing a magazine publishing company.  These methods are:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business value is equal to the cost of acquiring its physical assets.
  1. Income approach to value (capitalization of earnings): This method is most applicable to publishers that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  1. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established publishing companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.
  1. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded publishing companies and privately held publishing companies.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following average benchmarking data is based on studies from various periodical publishing companies:[12]

2007

2008

2009

2010

2011

Operating Profit (% of Net Sales)

6.8

4.7

3.5

5.1

5.6

Sales/Net Fixed Assets

18.4

28.2

20.8

25.2

27.4

Current Ratio

1.8

1.3

1.4

1.4

1.2

Quick Ratio

1.4

1.3

1.0

1.2

1.2

The benchmark data show that operating profit as a percent of sales hit a low point during the 2008-2009 recession.  Sales to net fixed assets bounces around from year to year.  Sales to fixed assets and current assets to current liabilities have decreased over the past five years.

Before using these benchmarks for specific valuation purposes, they should be evaluated for appropriateness.

Industry Organizations and Publications

Some organizations that publish helpful information about the magazine and periodicals industry include:

  1. Association of Magazine Media: www.magazine.org, an industry association representing 175 domestic magazine companies
  2. Professional Publishers Association: www.ppa.co.uk, a U.K. based association of over 200 companies engaged in consumer magazine publishing and business-to-business data and information publishing
  3. Alliance for Audited Media: www.auditedmedia.com, an organization of North American advertisers, advertising agencies, and content providers that verifies and evaluates circulation data, formerly the Audit Bureau of Circulations

Availability of Publicly Traded Comparable Companies

Several publicly traded publishing companies, by market capitalization, are:[13]

  1. Time Warner Inc. ($44.8 billion)
  2. Reed Elsevier ($12.3 billion)
  3. John Wiley & Sons ($2.2 billion)
  4. Meredith Corporation ($1.5 billion)
  5. Martha Stewart Living Omnimedia ($163.7 million)

It should be noted that some of these companies also engage in a variety of other publishing activities and non-publishing activities and are not exclusively magazine and periodical publishing companies.  Based on a number of publicly traded magazine publishers, the magazine and periodical publishing industry has a price to earnings ratio of 21.9.[14]

Availability of Private Purchase Transactions

In addition to public publishing companies, data regarding privately held periodical publishers can also provide a useful benchmark when valuing a magazine business.  The size and scope of private publishing companies that have been bought and sold over the last five years varies greatly, both in terms of their sales and the purchase price paid for the companies.

Fulcrum identified 14 private purchases of periodical publishing companies over the five year period from July 1, 2007 through June 30, 2012.  These transactions show the following ranges:[15]

  1. Total deal values ranged from $80,000 to $1.2 billion.
  1. Market value of invested capital (MVIC) to net sales ranged from 0.3 to 2.2 times with a median of 0.7.
  1. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 1.2 to 33.6 times with a median of 3.7.

This range of market multiples is too variant to be useful without further analysis. As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject. Additionally, industry economic conditions also vary over time, which can affect publishing companies as investment opportunities.  Specific factors that are unique for each company must be considered.  Some of these factors include the:

  1. Competitive environment in the geographic area served by the company’s magazines
  2. Extent of the company’s investment in electronic news publishing
  3. Competitive environment for publishers serving a niche market
  4. History of the publishing company and its magazines
  5. Established relationships with advertisers

Fulcrum Inquiry performs business appraisals for magazine publishing companies and other businesses.

 


[1] “Magazine & Periodical Publishing in the US: Market Research Report,” www.IBISWorld.com

[2] “Magazine & Periodical Publishing in the US: 51112, “ IBISWorld, March 18, 2009.

[3] “Top 25 U.S. Consumer Magazines for June 2012,” www.auditmedia.com

[4] 2007 Census: Product Lines, Industry Statistics Sampler: NAICS 51112 – Periodical Publishers, www.census.gov

[5] Magazine Titles Data (YTD), January – September 2012 vs 2011, The Association of Magazine Media, www.magazine.org

[6] TimeWarner Annual Report 2011

[7] Reed Elsevier Annual Reports and Financial Statements 2011

[8] About Advance Publications, Inc., www.advance.net

[9] About Us, www.condenast.com

[10] Advance Magazine Publishers Inc., Google Finance

[11] Heritage, www.condenast.com

[12] RMA (The Risk Management Association)

[13] Google Finance

[14] Industry Center – Publishing – Periodicals, Yahoo! Finance

[15] Private transaction data obtained from Pratt’s Stats available through www.bvmarketdata.com

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