Credit Freeze Putting Ice on Sale of Variety

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The sale of Hollywood’s legendary entertainment trade publication Variety has become yet another victim of the global credit freeze.

Reed Elsevier Group plc put Variety and the rest of its Information Business division on the auction block in June with full knowledge of the credit crunch but it added some financial sweeteners it figured would seal the deal.

Some 40 prospective buyers kicked the tires and fewer than 10 made it to advanced talks. One private equity group led by Boston-based Bain Capital is considered the leading suitor. But with the U.S. and world financial crisis gathering steam, progress has stalled.

“I don’t think it is a failed auction yet, but it certainly is facing stiff headwinds for the foreseeable future,” a source close to the situation told the Business Journal.

The London-based Reed hoped to head off problems by arranging $1.26 billion worth of pre-arranged, so-called “staple” financing that the buyer walks into. To top it off, Reed offered to finance the remainder, up to $300 million, with its own money. That would make the potential sale price of $1.5 billion or more for Reed, which had revenues of $1.76 billion in 2007.

However, since Wall Street’s meltdown, six investment banks that earlier pledged to supply the staple financing have yet to make a solid commitment to do so, according to those involved in the bidding process.

The six banks, led by Swiss banking giant UBS, include: J.P. Morgan Chase, the Royal Bank of Scotland plc, the Bank of Ireland, Lloyds TSB Group and French bank BNP Paribas SA, according to Reed spokesman Patrick Kerr.

But the deal is not dead.

The private equity group led by Bain, co-founded by former Republican presidential candidate Mitt Romney, is moving into the third round of bidding for Variety and Reed’s entire portfolio of 17 trade publications, according to those close to the bidding process

The other potential buyers still in the running include Providence Equity Partners, and Advent International, both based in Providence, R.I.; and Quadrangle Group with offices in New York City and Silicon Valley. Also, New York City-based Apollo Investment Management has teamed up with ZelnickMedia, an L.A. firm led by Strauss Zelnick, a former non-executive director of Reed Elsevier until last year.

Less clear is the interest of McGraw Hill Cos., the New York City-based publisher of Business Week and owner of credit rating agency Standard & Poor’s. It may be teaming up with Advent and Quadrangle for a syndicated bid, according to a source.

Among those that submitted serious bids but are no longer in the running are premier names, including Washington, D.C., based Carlyle Group and New York City-based Blackstone Group. Their bids were significantly lower than Reed was seeking and as financing for a higher offer could not be found they took themselves out of the bidding, according to reports in London’s Daily Telegraph.

And just last week Reuters reported that Gruner + Jahr GmbH & Co., Germany’s largest publishing house, also had pulled out of the bidding.

Neither Kerr nor any other Reed executive would comment on the auction. Also declining comment were Variety Group President and Publisher Neil Stiles and Variety Editor Peter Bart.


Strategic shift

Reed has the largest collection of entertainment industry trade magazines in North America. They include Broadcast & Cable, Multichannel News and Video Business, all with substantial operations in Los Angeles.

In Britain, it publishes Computer Week and Farmer’s Weekly.

It also owns information giant LexisNexis Risk & Information Analytics Group, which provides case law and other information to lawyers and other users worldwide.

Reed, in effect, started the sales process in February when it announced an acquisition of ChoicePoint, an Alpharetta, Ga.-based provider of consumer data to businesses. The $4 billion deal recently closed. ChoicePoint is now a unit of Reed’s LexisNexis Risk & Information Analytics Group.

In line with Reed’s new business strategy, which focuses on the subscription-based personal and consumer information markets, the company announced it was getting out of the ad-based trade publication business.

Throughout the winter and spring, it developed a list of potential buyers and in June sent a prospectus to roughly 40 parties that expressed interest. Approximately 20 proposals were made but by Sept. 18, Reed had narrowed the group to fewer than 10.

However, some observers wonder if Reed chilled interest when, in announcing its acquisition of ChoicePoint, it called its trade publication business “cyclical ad-based.” In contrast, the information database business draws steady revenues from user fees.

The lengthy sale process has created a fog along the front lines of Reed’s Los Angeles publications such as Variety.

“We’re pretty much in the dark over here. We just keep our heads down and focus on getting the paper out every day,” said one Variety executive who asked not to be identified.

At least a year before news of the sale became publicly known, former Variety consultant Gerry Byrne orchestrated the recruitment of a number of Variety executives to the rival Hollywood Reporter. They include Elizabeth Guider, now the editor of the Reporter; Erik Mika, now publisher of the Reporter, and Rose Einstein, who is in charge of advertising.

Over the years, Variety has taken its share of Hollywood Reporter executives, editors and reporters, too, but never has such a top-level exodus occurred in such a short span.

Despite the defections and a general slowdown in film production, the magazine has continued to maintain its top slot among entertainment trade publications. Variety continues to have a print circulation of approximately 40,000 and tens of thousands of daily unique visitors to its Web sites.

Also, Variety and its sister publications are gearing up to move a few blocks from their longtime home at 5700 Wilshire Blvd. in December to a refurbished Wilshire high-rise across from the Los Angeles County Museum of Art.

Variety’s Stiles told the Los Angeles Business Journal in an August interview that the move to its new offices would proceed, along with upgrading its online sites.

“I have been spending quite a bit of time making sure that our move goes along smoothly,” Stiles said. “No matter who ends up owning us, we’re moving forward with our plans to expand our online initiatives that will ultimately increase revenue.”

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