Content Matters

The NY Post broke the news today that the long-rumored merger between satellite radio providers XM and Sirius Satellite Radio was a done deal.
The combined entity will have 14 million subscribers, approximately $1.5 billion in revenues and a market cap of $13 billion. 

The deal is being billed as a merger of equals, with XM shareholders receiving 4.6 shares of Sirius stock for each share held.  Sirius CEO Mel Karmazin will hold that same title at the combined company, while XM Chairman Gary Parsons will serve as Chairman.

The deal is a good one for both parties.  At this stage, both companies need to grow their market share, and competing against one another for expensive on-air talent (Howard Stern and NASCAR for Sirius; Oprah and Major League Baseball for XM) is a very costly way to get there.  In addition, each has been aggressively courting auto manufacturers, which contributes to their cost base.  Analysts estimate that the combined entity will be able to save $7 billion annually.

There had been previous concern that regulators might not approve a merger, but Bear Stearns reported last week that the merger would be likely to pass regulatory hurdles.  Clearly, the competition for XM and Sirius are traditional radio, HD Radio and the emerging forms of Internet radio such as Pandora, Lastfm and the many music blogs.  The combined entity will not have a lot of pricing power in this competitive landscape.

In late 2005, when naming both companies to the "50 Content Companies that Matter", I was unsure which of the two would emerge as the leader.  With this merger, the combined company is in a much stronger position than either could have been alone.

UPDATE: Staci Kramer at Paid Content shares an exchange she had with FCC Chairman Kevin Martin a month ago about a potential XM-Sirius merger.  There's no question that the regulatory hurdle remains high for this merger, though I believe the biggest competitive threat for these two will come from the emerging technologies, not from one another.

The story of Primedia has largely been a disappointing one for shareholders and employees alike.

The Company was originally founded as K-III Communications by Bill Reilly, Charlie McCurdy and Beverly Chell, with backing by KKR.  The management team had formerly run Macmillan Publishing, and following Macmillan's acquisition by Robert Maxwell, the team approached KKR with the intent of building a top tier media and publishing company. 

The model employed by K-III was the leveraged buildup, a new form of financing pioneered by KKR and later profiled in an HBS case study.  The model, using debt to finance acquisitions, required a strong level of discipline in acquisition terms (multiples) and strong organic growth to fund the debt.  Unfortunately, over time, Primedia began to pay higher multiples in an effort to "buy earnings", while many of its properties (including a number of former MacMillan businesses) were past their peak and not able to generate growth organically.

In the mid-to-late 1990's, Primedia began to divest assets to fund the debt.  Initially, press releases would talk about divestitures of "non-core assets".  Over time, a number of the flagship assets, including Seventeen and New York Magazines were sold to pay down the debt.  Last year, Primedia sold off its b2b trade publishing unit (now Prism Business Media).

What was left was a slimmed down company (less than $1 billion in revenues) with three primary businesses: Enthusiast media (largely automotive),  Consumer Guides (Apartment Guides, New Home Guides and Auto Guides) and Education (a small segment built largely around Channel One).

Now, via PaidContent and the Primedia website, comes word of their plan to sell the Enthusiast Division, with more than 90 websites, 75 publications, 65 conferences and more than half of their 2006 revenues.  The sale will be used to pay down debt.

Assuming they are successful with their divestiture, that will leave a business consisting mainly of the Apartment and New Home Guides, plus Channel One.  While this business (formerly known as Haas Publishing) has always been among the most profitable businesses for Primedia, it's astounding to think that's all that is left from what was once a $2 Billion diversified publishing business.  While I'm sure that KKR will be happy to recover some of its investment (after 15+ years), for those of us who previously worked at Primedia, it's sad to see.

UPDATE: The NY Post (which has always covered Primedia more closely than the mainstream business news) has this article, suggesting the sale will bring $1 billion or more.