Reed Business Information was a media package ordained to sell itself. Just putting the B2B division of Reed Elsevier Group plc up for sale in February 2008 stirred more excitement than publishing had seen in years.
RBI's Anglo-Dutch parent seemed so confident at the outset of the UBS-run auction that it even signaled an unwillingness to break up the 400-plus group of magazines. Bids for RBI in toto would definitely fare better than those for RBI in pieces. Never mind that the winning offer was initially expected to fall between $2.25 billion and $2.75 billion -- a lot of cash for strategics and financials alike, even when times were good.
Reed Elsevier also displayed confidence by withholding Reed Exhibitions from the auction. Exhibitions and RBI had been housed together inside their parent's Reed Business division, making it the world's largest exhibition organizer and business-to-business publisher. Many considered the two units too complementary to separate -- "hand in glove," one source says. That Reed Elsevier elected to part with one and not the other had to do with growth prospects (Exhibitions' are greater) and advertising dependency (RBI's is greater).
The latter was cited in a memo from Reed Business CEO Gerard van de Aast as the reason for jettisoning RBI. "Its strategic fit is less clear," he wrote, explaining the auction to staff, "since Reed Elsevier has decided to move away from advertising-driven revenue models and focus on subscription-based models."
Some thought the reasoning smug in that only 15% of Reed Elsevier's year-earlier revenue was ad-dependent. So what if 56% of RBI's revenue over the same period came from ads in B2B titles such as Variety, Broadcasting & Cable, Publishers Weekly and Design News? Wasn't the company as a whole well-positioned to withstand a downturn in the ad economy? It was almost as if Reed Elsevier patronized prospects by saying, in effect, these assets no longer cut it here but are likely to be of interest to you.
Whatever haughtiness Reed Elsevier brought to the auction eventually disappeared. In fact, by the time the information memorandum went out in July, UBS had assembled a bank syndicate to provide $1.2 billion in staple financing. And Reed Elsevier committed itself to a $320 million vendor loan.
Equally telling was the seller's abandoning its "in toto" criterion. That is, after much revising, Reed Elsevier's memorandum wound up presenting financial data in ways that allowed for valuations of RBI in pieces. This made sense given 33% of RBI's revenue came from North America, which in turn indicated that region alone could fetch between $750 million and $900 million based on initial expectations. Yet even the low end of this range was already over the informal $500 million cutoff that, for private equity, had come to separate deals still doable from those exceedingly difficult.
The revisions helped elicit two dozen expressions of interest in RBI -- enough for Reed Elsevier CEO Crispin Davis to report "strong buyer interest" at the end of July. Particularly promising was participation by strategics McGraw-Hill Cos. and Bertelsmann AG's Gruner+Jahr. Unlike their financial counterparts, strategics can justify higher prices by factoring synergies into their bids.
Within two months, however, credit markets and the economy had deteriorated to a degree deterring both strategics. This left the field to Bain Capital LLC and two club bids -- Apollo Management LP and ZelnickMedia Corp.; TPG Capital and DLJ Merchant Banking Partners LP -- and prompted a mid-November admission from Reed Elsevier that "a satisfactory outcome cannot be certain." Talks continued with "a small number of prospective buyers," it said.
Yet even those ended after a worsening outlook for print reduced the final offer to a number a source put at just under $1 billion, representing only about 4 times Ebitda. "It may have been a psychological barrier to proceeding," the source says. "They wanted the winning bid to at least begin with a 1."
Reed Elsevier officially abandoned its 10-month selling effort on Dec. 10 after determining, in the words of Davis, RBI "has significantly more value to our shareholders than could be realized in a transaction." And so what would have been a completed transaction in any other era became a deal emblematic of 2008 by joining an alarmingly lengthy roster of big ones that got away.