Saddled With Debt, Comdex Operator Looks for Way Out

Wall Street West

by Benjamin Mark Cole

Is Comdex up for grabs?

The annual Las Vegas trade show, the world’s biggest computer and information-technology event, is owned by struggling Key3Media Group Inc., the Big Board-traded company based in the mid-Wilshire district of Los Angeles.

Key3Media’s stock has sagged to about 30 cents a share last week, from more than $10 a year ago.

The company’s $300 million in bonds are trading at under 40 cents per dollar of face value a sign that restructuring lies ahead, bond traders said. “These are 11.25 percent bonds maturing in 2011,” said one trader. “The effective yield is more than 30 percent. That tells you something has got to give.”

But what? Company officials last week wouldn’t say. “All I can tell you is that we are talking to a lot of people, and looking at a lot of different options,” said Rick Moore, a company spokesman.

Rumors have circulated that Key3Media held exploratory merger talks with Cleveland-based Advanstar Communications Inc., another trade-show and publishing outfit, but the talks dead-ended.

Last November, Comdex attendance fell to 125,000 from 200,000 a year earlier. In past years, the event has been so heavily attended that hotel rooms in Las Vegas have sold out and cell phones jammed.

Traffic down

While Comdex remains the biggie, foot traffic at all types of tech trade shows is down this year by about one-third, according to industry estimates.

Sept. 11 was a factor in last year’s drop-off at Comdex, Moore said. “We think attendance will actually be up a little this year.”

The attendance shortfalls have crimped revenues, especially from ancillary generators such as event publications and seminars.

But by most measures the company is operating in satisfactory fashion. It reported revenues of $279 million in the past four quarters, notwithstanding its microcap-sized market capitalization of less than $25 million.

The problem is debt. While the company earns $45 million a year, as measured by EBITDA earnings before interest, taxes, depreciation and amortization it must pay more than $30 million a year to bondholders. Banks get another chunk. Key3Media made a semi-annual interest payment on June 17, but reported that a line of bank credit had been cut back. So the debt wolves are at the front door.

The $300 million bond debt burden was assumed in a leveraged buyout of the company a couple years back by a team that included Softbank Corp., the big Japanese financial conglomerate and venture firm.

“In the late 1990s, it looked like running tech-oriented trade shows would be a money-making business forever, so Softbank leveraged up to buy Comdex,” said one bond analyst. “But the tech business went the wrong direction.”

Andersen Fallout

Bob Pearlman, president of the Los Angeles Venture Association, has taken his spreadsheets west. Last week, Pearlman said he was joining BDO Seidman LLP in Century City as a partner, leaving Grant Thornton LLP where he was a partner in the downtown L.A. office’s technology and industry practice.

Why the move? “BDO Seidman, with the demise of Andersen, will become the fifth-largest accounting firm in the country,” Pearlman said. “They have a commitment to the technology corridor between Los Angeles and Santa Barbara. They really focus on middle-market and entrepreneurial clients, and that is where I wanted to be.”

Within the industry, Pearlman is known as a rainmaker, in part because of his association with the venerable LAVA, and also the Valley Industry and Commerce Association.

Pearlman does auditing work, but part of his practice is preparing growth companies for their next “liquidity event,” which could be an initial public offering, a fresh round of debt or equity, or a sale to another company.

BDO Seidman does not directly perform consulting work for clients a source of conflicts, oftentimes but does have the BDO Alliance of affiliated consultants and legal beagles.

With Arthur Andersen fading and some clients up for grabs, Pearlman has put on his rainmaking gear. “A lot of middle-market firms really don’t need a Big 5, or now Big 4, accounting firm. They just use them because they think they are supposed to. Our rate structure is probably a little lower than the biggest firms,” said Pearlman. “And you get a lot more personal attention from a firm our size.”

ESOP Redux

Last week’s column item about ESOPs (employee stock ownership plans) drew spirited comments from pro-ESOP forces out there, including from Chris Kramer, of the Long Beach-based SEG Companies Inc. SEG performs evaluations for companies considering an ESOP, and sets up ESOPs for a few clients every year.

“Actually, when business valuations are down, that is the perfect time for an ESOP,” Kramer said. “The buyers are getting a good price. The seller is getting a tax break (a one-time, tax-free treatment of capital gains, if rolled over into domestic stocks). For many owners, there is no other way to sell.”

True, employees shouldn’t have all their assets in one company, Kramer said. But ESOPs can co-exist side-by-side with 401(k) programs, which allow employees to diversify. Kramer conceded that shuttering 401(k) programs and then converting them to ESOPs might be a bad idea. “But to mention an Enron in connection with most ESOPs is not fair,” he said. “Enron was about fraud. Fraud is what is bad, not ESOPs.”

Kramer added that SEG performs valuations for a flat fee, set in advance.

Small Claims?

Probably most investors know that unclaimed bank deposits eventually become state property. But uncashed vendor checks?

Some merger deals have nearly been scuttled when audits revealed large amounts of uncashed vendor checks, said Steve Wlodychak, a state and local tax expert with Ernst & Young in downtown Los Angeles. “On one $50 million merger, there turned out to be several million (dollars) in unclaimed property,” he said.

As it turns out, uncashed vendor checks, just like bank deposits, become state property if the vendor cannot be located. Sometimes vendors go out of business and cannot be found. Other times they can be located, but in any event, the money does not belong the to issuer of the check.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at

[email protected].