The money men

Opinions in the media industry differ as to whether or not private equity is a godsend, but an undeniable quality private equity companies can bring to the table is a longer-term view of a business - one that's usually devoid of emotional baggage.

Don't be fooled by recent headlines implying the private equity bubble has burst. True, there's been speculation about how much more difficult it's going to be to borrow money for leveraged deals this year, what with a credit crunch under way and talk of recession in the air.

But the reality is that, in the UK's media and ad sectors, we're only just entering the post-plc era. And after all, the most striking private equity deal in this market - the £1 billion joint Apax-Guardian Media Group acquisition of Emap - took place in December, well after the credit crunch had supposedly bitten. Even more recently, it has emerged that BBC Worldwide is planning to turn to private equity to fund its global expansion plans.

What's more, the consensus in the City seems to be the adverse borrowing conditions are but a blip, and that an economy-wide, root-and-branch corporate restructuring process will continue. It could make the late 80s' junk bond era seem like a school picnic.

Since 2005, we have seen some whopping private equity deals across the globe, including the biggest-ever (Equity Office Properties Trust, at $38.9 billion), the biggest-ever involving a media company ($25.7 billion Clear Channel Communications) and the biggest-ever in Europe ($13.9 billion Danish telecoms). And let's not forget 2007 saw some huge deals in the UK, involving Sainsbury's (though this one failed, ultimately), Allied Boots, the AA's merger with Saga, Emap and - most notoriously - EMI.

Indeed, speculation about possible deals continues. For instance, media reports early this month suggested a triumvirate of private equity houses, Apax, Provident and Kohlberg Kravis Roberts, was poised to mount a renewed £3 billion bid for ITV.

The burning question now is if private equity will be good news for the advertising community in the long run. This can be an emotive issue. Not for nothing was Henry Kravis, the joint founder of KKR, who routinely leads $200 billion of leveraged buyouts a year, portrayed as the leader of the "Barbarians at the Gate" in the book and film of that name.

Private equity's emotional spectrum is perhaps best defined for the media industry by two Guardian stalwarts. A year ago, as Guardian Media Group sold 49.9 per cent of its Trader Group subsidiary to Apax, the GMG chief executive, Carolyn McCall, was quoted in The Guardian to the effect that Apax would be "an excellent partner in this business". Compare that with the line taken by star columnist Polly Toynbee. Her column in June 2007 wasn't referring to the Trader deal specifically (rather a Treasury select committee investigation into private equity practices), but its headline, "Stick it to these City caesars - for the good of the nation", carries a flavour of her attitude towards the likes of Apax.

Many creatives will continue to cheer her every word. The negative take on private equity is that its foot soldiers are asset strippers who pounce on decent companies whose only crime is failing to meet the lazy expectations of City analysts. Take Emap. Its expansion plans of the late 90s blew up following the failure of a big US magazine acquisition. It had no "plan B" - and its confusion was compounded when it failed to derive a coherent digital game plan. But the City demands growth - and Emap had run out of opportunities to grow by acquisition. Something had to give. And some in the advertising industry remain unhappy about that.

But a more optimistic view is that a big-but-confused corporation will be in far better hands if it succumbs to private equity. Private equity companies believe there's nothing wrong in being a low-growth, high cashflow business. They can actually take a longer-term view than the City, because they are not distracted by the tyranny of quarterly results announcements. Their goal is to turn around a company within three to five years, and then sell it on.

Once under a calmer regime, such companies tend to forge better relationships with their customers. They are also more fleet of foot, better at decision-making and more open to ideas. As Hugo Drayton, the chief executive of the behavioural-targeting company, Phorm UK, puts it: "Traditional media companies are facing huge challenges with digital and the audience fragmentation that we're seeing. Some media owners are emotionally attached to certain ways of doing things. Private equity can be more detached."

Yet even the optimists admit there are niggling doubts. For instance, what happens when the five-year cycle is up? Who do the private equity companies then sell their media assets to? Will we eventually see the constituent parts of these businesses re-floated in diminished form?

There's an extra layer of worry in the media sector. Private equity is arguably great at undertaking a bit of judicious pruning when confronted with a mature, commodity-led business. But as Simon Rattner, the managing partner of the private equity company, Quadrangle Partners, famously put it: "It's true that private equity firms often can't relate to creativity and talent."

As, indeed, Guy Hands, the founder of Terra Firma, is attempting to prove in rather spectacular fashion. In August 2007, Terra Firma paid £2.4 billion to acquire EMI. By January, following a drastic round of job losses and budget cuts, many of the label's artists were threatening to leave and one, Robbie Williams, announced he was on strike.

What's the verdict? Will our media be safe in private equity hands? Absolutely, Tim Duffy, the chief executive of M&C Saatchi, says. But he has a different take on this, too. He says the ad industry should rejoice because the truth is, private equity-owned companies make better clients. That's why he's set up a specialist division, Accelerator, to cater for their demands.

He concludes: "Private equity companies can think longer term because they can see further than the next quarter. They are a vibrant force. Their focus is on delivering top-line growth - and no-one is more concerned about growth than marketers. If you can help them map growth, you will be listened to. That's why it's our view that this is a big opportunity for ad agencies."


Where the media sector is concerned, David Elstein's name has arguably been in the private equity frame for longer than most. Having joined the industry as a BBC trainee producer after graduating from university, he worked his way up through the ranks in the 80s then left to join the independent production sector. He switched to commercial TV at Thames Television (the then London weekday broadcaster in the ITV network), where he eventually became director of television. After Thames lost its franchise in 1993, he became director of programmes at BSkyB, before landing the highest-profile role in his career as launch chief executive of five.

Elstein moved on in 2001 following strategy disagreements with the channel's backers, but it wasn't long before he was being linked with a private equity-backed coup to buy ITV in 2003. According to heated speculation in the press, his plan was to save money by selling off the broadcaster's in-house production capacity - a notion that was fiercely attacked by ITV's then management.

The opportunity passed. It wasn't long before Elstein re-emerged as a player, this time leading a successful $254 million bid, backed by 3i and Providence Equity Partners, for the international operations of Hallmark Channel. In August 2007, the asset was sold on to NBC for around $350 million.

Elstein's analysis was that it took a private equity company to unlock Hallmark's value. "All the majors clustered around the (original) sale - News Corp, Warner, Viacom, Disney. But none of them could make sense of it because all of them ran one or more of these types of business. So nobody wanted to buy the whole package," he said at the time.

Apax Partners boasts private equity's most respected media practitioner (certainly on this side of the Atlantic: he's London office boss as well as leading the global media team), Stephen Grabiner. Such is Grabiner's drawing power that he has managed to surround himself with a stellar array of big hitters, either as advisers or bid figureheads.

The biggest hitter of all is Greg Dyke, a former LWT chief executive and director-general of the BBC. He headed up an Apax bid for ITV in April 2006.

Grabiner has a formidable pedigree as a media manager in this own right, having been managing director of the Telegraph newspaper and chief executive of ONdigital. At Apax, he has been responsible for deals involving Yell Group, Hit Entertainment, Incisive Media, Trader Group and Emap.

Another former ITV heavyweight to have returned to the media sector courtesy of private equity is the former ITV chief executive Charles Allen. Last June, he fronted up the acquisition by Lydian Capital Partners of Chrysalis Radio for £170 million. Now called Global Radio, the company will now be a vehicle for further acquisitions in the radio sector. It failed to snap up Emap's radio interests back in December, but is believed to be hatching a bid for GCap.



April: The ITV board rejects an uninvited bid by a consortium including Apax Partners, Goldman Sachs Capital and Blackstone. Fronted by former BBC director-general Greg Dyke, the approach values ITV at £5.3 billion ...

October: Ex-Clear Channel boss Roger Parry is invited by the Takeover Panel to end speculation that he is preparing to mount another private equity-backed bid for ITV ... Following poor results and the failure of merger talks with UTV, SMG alerts potential private investors that it is reviewing its options ...

November: Virgin Media (itself already heavily indebted) reveals it is trying to raise £5 billion to launch a bid for ITV. Private equity fund Kohlberg Kravis Roberts is sounded out as a possible partner - but is believed to be plotting a separate bid in league with pan-European media TV company RTL ...


January: Pearson's share price soars amid City rumours of an immenent private equity bid, either for the whole company or the Financial Times ...

March: Guardian Media Group sells a 49.9 per cent stake in its Trader Media Group for £675 million. It had originally acquired Trader Media in 2003 from the private equity company, BC Partners ...

May: Charterhouse Capital partners buys the Times Educational Supplement and the Times Higher Education Supplement from fellow private equity company Exponent ...

June: Dennis Publishing sells its US magazine operation to Quadrangle Capital Partners for £121 million ... Swiss-based Lydian Capital Partners, chaired by Irish businessman Denis Brosnan and involving entrepreneurs JP McManus, John Magnier and Michael Tabor, makes a successful £170 million bid for Chrysalis Radio ...

July: Carlyle Group launches £9.95 billion bid for Virgin Media ... Dow Jones, seeking a way to block Rupert Murdoch's £2.5 billion News Corp bid, offers chunks of Dow Jones shares to private equity companies ... A consortium involving KKR, Cinven and Blackstone attempts to trump Carlyle's bid for Virgin ... and there's speculation Apax may be poised to make a bid for Emap ...

August: Terra Firma acquires EMI for £2.4 billion ... Apax is now rumoured to have entered talks with GMG about a joint bid for Emap ... The credit squeeze calls a halt to Virgin Media talks ... Another Virgin brand, SMG-owned Virgin Radio, revives plans for a separate flotation after SMG failed to find a suitable private equity suitor ... A consortium of 3i, Sparrowhawk Holdings and Providence sells Hallmark Channel to NBC for £174 million ... SMG sells Primesight to GMT Communications Partners ...

September: Virgin Radio abandons its flotation plans and once more seeks private equity investment ...

October: Trinity Mirror sells Racing Post to FL Partners for £170 million ...

December: Following Emap's disposal of its consumer magazine and radio interests, it finally agrees to a £1 billion joint Apax-Guardian takeover ...