Sigh, Newhouse

This summer, Fortune magazine ran a story about Condé Nast that provided startling details about the financial performance of the company and its flagship publication, The New Yorker. As the deal season starts afresh, with the prospect of ever hotter media acquisitions and combinations, we suspect that a variation on the following memo is being circulated among partners at consulting groups and boutique investment banks around town.

To: New-prospects committee
From: Media group
Re: Selling The New Yorker
Routing: Partners only

The opportunity
With as much as $400 million invested in The New Yorker since its acquisition by Condé Nast in 1985, continued publication is no longer justifiable from any conventional ROI analysis. In the past, losses have been rationalized as lending “value” to the entire stable of Condé Nast magazines – The New Yorker’s prestige, in other words, has helped float the larger Condé Nast boat. Now, however, as Advance, the parent company, takes steps to clean up its balance sheet (e.g., sale of Random House) in anticipation of a public offering, or some other liquidity event related to forthcoming estate issues (Si Newhouse is 70, his brother Donald is 68), The New Yorker’s losses become a fiscal flash point. What’s more, the magazine’s “value” to the Condé Nast organization – its brand equity – has been severely undermined by the resignation of Tina Brown (the Brown brand became a key element of the New Yorker brand); without Brown, and with a relatively unknown literary type at the helm, the brand is likely to further erode.

S. I. Newhouse would undoubtedly prefer not to be remembered as the man who folded The New Yorker. Yet without an alternative, pressures within the Newhouse family may force him to do just that.

The unique nature of The New Yorker, together with a highly motivated seller, indicates a clear opportunity for us to precipitate a transaction.

Seller’s Goals
Seller seeks to:

1. Remove The New Yorker’s operating losses from its balance sheet.

2. Avoid disclosure of a valuation that will undoubtedly set a record loss for the industry – buyer should therefore be a privately held company. (Similar issues regarding the confidentiality of the valuation quite likely prevailed in the Newhouses’ decision to sell Random House to the Bertelsmann organization, a private entity.)

3. Enter into a transaction that can be seen within the New Yorker organization as, on balance, a net positive event – one that will not destabilize the existing organization prior to the completion of a transaction. (Buyer should be prepared to make assurances with regard to editorial independence.)

Revised Operating Plan
Assumption should be made that there is no publishing company – public or private – that can continue to fund The New Yorker’s present losses. It is therefore imperative that we be prepared to argue the merits of a revised operating model. The attached pro forma reaches break-even in the twelfth quarter with a cumulative cash need of $20 million.

The plan permits significant erosion of the present 800,000 circulation – built on the basis of cheap subscription offers. We believe circulation should “soft land” at 400,000 – this defines a core liberal/urban elite who value the magazine enough to pay a nondiscounted subscription price ($3 per issue rather than the current discounted price of less than a dollar an issue).

The plan implements significant savings by maintaining The New Yorker’s “weekly” identity with a schedule of “double” and “special” issues, bringing annual frequency from the current 46-issue schedule to 22 issues.

The plan contemplates a 50 percent drop in editorial outlay – however, this can be described as a net per-issue gain!

The plan assumes only a modest increase in per-issue advertising pages.

We should assume that there is no ready buyer for The New Yorker on a strictly economic basis. Any deal will surely depend on significant concessions on the part of the seller, including financing of the purchase price and some participation in ongoing losses (we believe the Newhouse family will “pay” to accomplish a transaction).

In general, we are seeking buyers who can look beyond the likelihood that The New Yorker will not return a meaningful operating profit and who can leverage the New Yorker brand to achieve broader business or personal goals (if your dream is to own an important magazine, you’ll want to consider The New Yorker).

We believe the following targets represent The New Yorker’s first-tier buyers:

Meigher Communications – S. Christopher Meigher III is one of several former seniormost executives of Time Inc. (see Miller Publishing below) who leveraged golden handshakes into their own magazine-publishing companies. Meigher now publishes magazines targeted at the Upper East Side/Hamptons audience, including Saveur, a high-end food magazine; Garden Design, a lush gardening book; and Quest, a real-estate vehicle distributed on elevators in Manhattan’s top buildings. Reportedly Meigher has had cash-flow issues and is discussing selling a stake in the company to Ralph Lauren – certainly a strong partner for The New Yorker (we can envision a variety of tasteful brand extensions involving the New Yorker and Lauren imprimaturs). But Meigher’s focus on the “carriage trade,” together with his need to raise his profile in the investment community as he moves toward an IPO, makes him an ideal buyer. Meigher, however, is a knowledgeable and conservative player and obviously will understand the drawbacks of the acquisition. Dapper, aristocratic, lunching at “21” or The Four Seasons, he already acts like The New Yorker is his – unfortunately, he may therefore not feel the need to actually own it.

Zuckerman properties – Real-estate developer Mortimer Zuckerman’s stable of low-margin, underperforming, prestige magazines (The Atlantic, U.S. News & World Report, and the “new economy” business magazine Fast Company, along with the Daily News) would certainly be a natural home for The New Yorker. Zuckerman is not primarily concerned with bottom-line goals in the management of his publications and accepts tolerable losses. His strategy seems to be to make acquisitions when (a) a publication is available at a distress price, and (b) it has a brand name. Clearly, The New Yorker fits the Zuckerman criteria. What’s more, Harry Evans, Zuckerman’s editorial director, is, next to Tina Brown (Evans’s wife), probably the obvious-choice celebrity editor. There might well be some staff resistance at The New Yorker to Zuckerman; on the other hand, respected journalists seem to keep going to work for him.

Miller Publishing – Part of Bob Miller’s golden handshake from Time Inc. was an opportunity to buy Time’s interest in Vibe magazine, which Miller now owns with Quincy Jones. Miller and Jones have since acquired the music magazine Spin. Miller also owns various sports-related publications he acquired from the New York Times. His strategy is to control highly defined market categories. To facilitate a transaction, we would need to help him conceive of The New Yorker in those terms. Attached find our research on a consumer demographic we call the “urban elite” that contains a significant overlap with New Yorker readers. Unfortunately, the overlapping group is somewhat geriatric in composition; young members of this category apparently are not New Yorker readers. Of note: Miller was recently burned by Newhouse. Following a press leak that Miller was within hours of entering into a binding agreement to acquire Wired for $75 million, S. I. Newhouse stepped in with a bid of $90 million and took the deal. We are aware, however, of considerable concern within the Advance organization about the Wired purchase (why would a company dominated by fashion magazines want a technology magazine?). We could potentially orchestrate a doubleheader here if we could include Wired and The New Yorker in a deal with Miller (see Wired memo).

Hachette Filipacchi – David Pecker, the CEO of this U.S. subsidiary of a French magazine-and-book publisher (itself a subsidiary of a munitions manufacturer), has achieved impressive results acquiring respected brands – including Metropolitan Home and Mirabella – that have underperformed for other publishers and, with iron-fisted cost controls, turning them into profitable vehicles. A former accountant, he seems to take pride in both owning A-level brands and getting them to deliver a suitable return. (An exception to this discipline appears to be George, a dubious business proposition; obviously the JFK Jr. brand was the selling point for Pecker.) The Pecker formula is to produce a reasonable facsimile of the original product with only a marginal loss of quality (warning: this is what editors call “soul”) at significant overall savings. Obviously, this potential loss of “soul” will be a concern to New Yorker staffers. We believe, however, that if Pecker is kept in the background, and if the French owners are brought in to smooth the transition (chairman Daniel Filipacchi is very French and very charming!), this will undoubtedly be reassuring to the New Yorker staff.

Michael Kinsley – Kinsley, former editor of The New Republic and a Firing Line host, now the editor of Microsoft’s Seattle-based online magazine Slate, was offered the job of editor of The New Yorker by Newhouse following Tina Brown’s resignation. Kinsley, who is generally regarded as a bit of a prima donna and who seems to feel that no position quite matches his unquestionably significant accomplishments, asked for some time to think about the offer. Before he could accept, however, Newhouse told him that he had reconsidered – and then offered the job to David Remnick. Naturally, Kinsley was upset. So much so that he intemperately sent an e-mail to friends explaining how he had in essence been fired from a job he’d never held. This e-mail (circulated widely) appears to have left Kinsley stigmatized both for having lost the job and for having had the bad sense to send such an e-mail. Clearly, a way for him to recover his dignity is to buy The New Yorker. Our assumption is that he could finance the deal through his relationship with Microsoft. This will be unsettling for New Yorker staff – but Kinsley’s staff at Slate is reportedly eager to step in and take over. Kinsley and Gates at The New Yorker’s helm could be a powerful combination.

We do not foresee significant fees accruing from this transaction. Nevertheless, given The New Yorker’s prestige, we recommend that the firm actively seek a position either on the buy or the sell side of a transaction. We believe there is a high probability of success if we can bring a suitable deal to members of the Newhouse family.


Sigh, Newhouse