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THE DAY AHEAD: Dissecting the Primedia-About deal

COMMENTARY -- The Primedia and About.com merger makes tons of strategic sense. When combined, the latest marriage between old media and new media will create the king of all niches. So why are investors so skittish?

Here are a few reasons: About's (Nasdaq: BOUT) valuation, Primedia's (NYSE: PRM) financial picture and execution concerns.

The companies announced a stock swap worth about $690 million based on Friday's Primedia closing price. The deal calls for About shareholders to receive 2.3409 Primedia share for each About share, for a total of 45.2 million Primedia shares. There are no collars on the deal.

When you consider the big picture, Primedia, which publishes too many niche publications to mention, makes a great match for About, which has too many niche Web sites to mention. Think AOL Time Warner for cat lovers, Chevy truck drivers and teddy bear connoisseurs. "Niche is king, proclaimed Primedia CEO Tom Rogers, who started an analyst call with about 20 "about" puns in the first two minutes.

Investors on both sides of the aisle were skittish. Here are the talking points:

  • Valuation -- Although analysts were supportive of the strategy behind the deal, they weren't hip to the valuation. "The deal was priced at the lower end of the scale," said W.R. Hambrecht analyst Derek Brown.

    Analysts said Primedia got About for a song considering the online portal projected a profitable first quarter, weathered an online ad slump and grew revenue at a sharp clip. Brown said About was trading at 2.5 times his 2001 gross profit projection, compared to 7 times for its peers. Investors were also grumpy because About had a market cap approaching $2 billion just a few months ago.

    About is also bringing enough money to the table to fund Primedia's Internet expansion. About ended its third quarter with $133 million in cash and no debt. Primedia, which dwarfs About in revenue, wasn't anywhere close to having that much cash. About topped estimates in its third quarter with a loss of $3.2 million excluding charges on sales of $26.8 million.

    About CEO Scott Kurnit acknowledged the valuation concerns. "I would have clearly preferred our market cap when it was $1.6 billion," he said, referring to the dot-com glory days. Kurnit said the stock ratio was based on the companies 30-day, 60-day, 90-day and 100-day trading averages (see chart).

    My hunch -- Kurnit did the best he could regarding the valuation. Bottom line: If you're not AOL or Yahoo!, you're not getting the big bucks. Long-term About shareholders will realize that it isn't everyday that a beaten-up content dot-com is actually bought out. Look for About's shareholder base to turn over.

  • Primedia's financial picture -- Primedia loses money and isn't expected to be profitable in 2001. According to earnings tracking firm First Call Corp., one analyst is projecting a profit in 2002. Primedia, which carries a heavy debt load, ended its latest quarter with $29.7 million in cash. The company ended its third quarter with $1.65 billion in long-term debt. The good news? The debt was down from $2.2 billion at Dec. 31.

    The company also missed estimates with a third quarter loss of $43 million, or 34 cents a share. New media sales for continuing operations were $10.5 million in the third quarter, a small slice of total sales of $395 million.

    My hunch -- You'll see a lot more talk about Primedia's financials. In addition, only a quarter of Primedia's shares float on the market -- the rest is owned by buyout firm Kohlberg Kravis Roberts. Even with the shares Primedia is issuing for About, Primedia's buyout buddies run the show.

  • Execution -- Investors have seen enough offline/online mergers implode to be wary. Disney and Infoseek was tough, NBCI's collection of mediocre properties never panned out and AOL and Time Warner is a work in progress.

    Kurnit said Primedia's growth rate will surge once the company gets "some Internet juice into its veins."

    But cannibalization issues and culture clashes are prevalent in these old media/new media mergers. Meanwhile, Primedia hasn't had a great track record.

    Kurnit played down the concerns. "These two companies were meant to be together," said Kurnit. "They fit together elegantly." Armed with Primedia's 1,700 sales people, the combined company can sell deeper into verticals. The catch will be getting Primedia's sales force to sell online advertising.

    As recently as a year ago, Primedia sales people viewed online advertising as just a value-add vehicle to sell print ads. In the New World order, these sales folks may still have print as their primary responsibility. Can Kurnit sell Primedia's troops on Net religion?

    Kurnit said he's confident it'll all work. He said Primedia's sales team knows how to sell into niches, and what they don't know about the Internet they'll learn. "There will be training," said Kurnit. "For those that don't get it right away we'll be buying all of them laptops."

    My hunch -- Officials will pull off some synergies, but it won't turn out the way it's drawn up. Rogers and Kurnit may be on the same page, but it'll take a lot of preaching to meld the two cultures.TDAIN