May 2002
Treasure Hunt

Where do show companies find the capital to see them through tough times?

By Michael J. Flynn & Linda Kephart Flynn

While last year’s dark clouds clung to the show scene, Joel Davis was searching for the silver lining. During the fourth quarter, while many felt deluged by the Sept. 11th tragedy and the recession, Davis single-handedly raised nearly $1 million to

start JD Events by convincing 11 investors to commit $50,000 to $100,000 each.

A spin-off from Imark Communications, Davis’ new venture operates as a show incubator. His success says much about Davis’ professional experience, his salesmanship and his investors. It also demonstrates that even in a dismal economy, money still exists for good ideas. “Even with all the doom and gloom, people realize the business cycles will change,” says Davis. “I really believe this is a great time to start a new business and that the industry’s future is very positive.”

But challenges do exist. Large multimedia conglomerates and small show owners alike have seen attendance and exhibitors drop off, particularly in b-to-b sectors. And financial buyers no longer find the show industry attractive, leaving any major deals that might happen to strategic buyers. All these factors mean show organizers looking to find financing, restructure debt and access operating funds today face an interesting — but certainly not impossible — set of obstacles to overcome.

Big guns
Large companies are hurting because, “leverage works both ways,” says David Cheifetz, Managing Director of the New York media investment bank DeSilva & Phillips. “The intense merger and acquisition activity of the past several years is the problem. They paid dearly for those acquisitions, and they’re dealing with tremendous debt.”

Some companies, like Penton Media Inc., have watched their show and advertising revenues wane, hampering their ability to make loan payments. It’s common for those loans to include covenants, or agreements, regarding the ratio between earnings and debt. Low earnings mean lender troubles.

Facing significant covenant restrictions on its secured credit, publicly traded Penton renegotiated its long-term debt amendments with its bankers and finalized a preferred stock and warrants offering in March with an investor group led by ABRY Mezzanine Partners LP. Penton expects to finalize the sale of an additional preferred stock and warrants offering worth $10 million in coming weeks with the same group. Immediately afterward, Penton said it was planning an offering of $157.5 million in senior secured notes, or bonds, due in 2007.

“The whole idea of raising the cash was to de-lever the company, bring down debt,” says Mary Abood, Penton’s Vice President, Corporate Communications & Investor Relations. “We had $180.6 million in senior bank debt, and the proceeds from the preferred offering and other funds were used to pay that down. We’re also planning to use proceeds from the high-yield offering to pay down debt.” She says the company’s new bank amendment provides Penton with a $40 million revolving credit line and significant covenant relief.

“We look at these activities as getting us where we want to be in terms of strengthening the company’s capital structure,” Abood says.

Key deal
Key3Media, producer of Comdex and about 60 other IT events, also has undergone refinancing and debt restructuring in the past nine months. The public company raised $67 million in equity capital during 2001’s fourth quarter. Conducted as a private placement, the deal involved issuing convertible redeemable preferred stock. The company also exchanged $10 million face value of its senior subordinated notes, due in 2011, for $7.5 million convertible redeemable preferred stock through a private placement. The money raised let Key3Media amend its senior bank credit facility agreements, gaining less-restrictive covenants.

“I think of it as a defensive raise to take us through the tough times,” says Fredric Rosen, Key3Media’s Chairman and CEO. “We knew that after Sept. 11th things would be tough for large destination shows like ours. People weren’t comfortable traveling.”
Key3Media’s lending banks recommended the company raise $50 million in equity capital as part of restructuring its debt. Rosen, however, found a receptive investor audience that provided an additional $17 million. “It’s nice to have the extra cushion,” he says.

These latest financial moves followed Key3Media’s refinancing, last June, of $300 million in bank debt and another $84 million in bonds through an underwritten public offering of senior subordinated notes providing principle of $300 million. The company also secured another $150 million in committed senior secured credit with a number of large banks.

Timing is …
Other large event companies have enjoyed an easier time financially over the past year. To react to the economy, Imark President and CEO David Korse and his team discussed where to direct their time and efforts in growing the Natick, MA-based technology events company. Should they continue expanding globally, or increase their focus in the United States? Not long after that meeting, VNU’s Business Media Europe approached Korse with an offer to acquire Imark’s United Kingdom-based European operations.

“This was a strategic investment for VNU. Our events matched their publications,” says Korse. “Their offer just made it easier to decide to refocus on the growth opportunities of our American business.” Korse declined to reveal the financial details of the sale. According to VNU, Imark’s European group employed 40 people and generated revenues of about $11 million (U.S.) in 2000. The acquisition price exceeded $16 million.

“We’ll use the proceeds for acquisitions and normal business operations,” says Korse. “But more than the money, the decision was about how we were going to spend our time and energy resources, and what was the best move for the company.”

The M&A way?
A few years of tricky economics have knocked some of the sparkle off M&A activity in the show industry. “The difficulty now is the tremendous disparity between what sellers think shows are worth and what buyers are willing to pay,” says DeSilva & Phillips’ Cheifetz. “The only deals being made are by strategic buyers. We all got spoiled by the extended period when the industry was very attractive to the financial players, but they’re basically out of the picture now.”

According to The Jordan Edmiston Group Inc. (JEGI), New York media investment bankers, the number of media and information industry properties sold dropped 12 percent in 2001, from 460 in 2000 to 407. The $18.6 billion total value of 2001’s M&A activity came nowhere near 2000’s $48.9 billion or 1999’s $45.1 billion. Trade show-
specific M&A in 2001, JEGI reports, consisted of 32 deals worth $505 million in the first half of the year. Only 17 more transactions, worth $177 million, took place before Dec. 31.

“Deals are still getting done, but it hasn’t been easy,” says JEGI Managing Director Richard Mead. “Large banks are still very gun-shy. The amounts they’re willing to lend are lower — three to four times cash flow and sometimes less, on a case-by-case basis. That’s compared to five to six times cash flow a couple of years ago.”

As the larger players continue to restructure their financing, it’s possible that at least strategic M&A activity will rise. “If you’re a public company driven by shareholder expectations to double your returns, that’s not going to happen organically,” says Mead. “They’ll have to do it through mergers and acquisitions.”

Independent funding
Acquisitions are on Joel Davis’ mind, but he plans to use his new-found funds to create new shows that JD Events will later sell. When Davis shopped his idea for a show incubator, his industry contacts supported his concept in the best possible fashion: with cash, becoming unidentified, silent partners.

The entrepreneur credits a well-thought-out business plan, realistic return projections and his willingness to put his own money into his business. “I’ve got a lot of my own skin in the game,” he says. “When you do that, people understand that you’re serious about succeeding.”

During his 16 years in the business, Davis has worked for many firms, including Reed Exhibitions and eMarketWorld. Former employer Imark is still involved — Davis and his nine employees will oversee Imark’s two @d:tech events for a management fee. And the two shows Davis will launch this year — Travel Commerce Conference & Expo and Satellite Application Technology Conference — include profit sharing and a purchase option for Imark.

Established operators
While startups now are seen as particularly risky, the recession also has made it difficult for established smaller companies to obtain financing. So when Lew Shomer, president of Shomex Productions in Santa Monica, CA, needed additional operating capital last year, he knew he’d have to head to the banks. “Any time we’ve been in a financing situation, it’s personal financing based on our business results,” says the owner of the 17-year-old company. “It’s lending based on the assets of the company and what my wife and I could convince them to lend. For the little guys, the rules haven’t changed: You either finance things internally or you go to the banks.”

Last year, during the fourth quarter, Shomer found that even banks that carried his existing credit lines wouldn’t lend in the face of economic uncertainty. The larger banks were “incredibly tight,” he says. Shomer finally found the undisclosed loan amount he needed from a secondary, regional bank that was willing to hear his story. “You really have to market yourself and your company,” he says. “You have to be incredibly flexible.”

Association scene
Raising money to get through tough times is vital, but for now most associations are relying on their reserves and hoping for an upswing in the economy, according to the American Society of Association Executives. “Neither (President) Mike Olson nor I know of any association looking for show-related financing right now,” says Dick Bray, ASAE Director of Expositions. “We, like a lot of our members, have had to do some belt-tightening, but as bad as everyone said 2001 was, it didn’t hit associations hard enough to put them in a really bad position.”

Bray says most groups, if faced with further financial challenges, would cut services before putting their revenue-rich shows at risk. A growing number of associations, he notes, have started outsourcing their shows to management companies, which are perceived as better-equipped to focus on selling and producing the events.

One such transaction in January involved the Washington, DC-area Association for Information and Image Management (AIIM) International, which sold its AIIM Conference & Exposition to Boston’s Advanstar Communications. The transaction was worth “in the millions,” says AIIM International President John Mancini.

“The reasons were part strategic, part financial and part a number of other things,” he says. Advanstar was able to run the show more efficiently and effectively, and AIIM recognized what the company’s experience and resources could mean to growing the event. “From an operating perspective, we didn’t need to do this, but we wanted a partner that could take the show to the next level while we focus on what this association is about,” Mancini says.

Consumer considerations
It’s possible, in an ironic twist, that some of those shows less likely to obtain funding are those that don’t seem to feel a need just yet. That would be the consumer show operators.

“Most consumer shows aren’t good candidates for bank financing,” says Karen Tejera, President of the National Association of Consumer Shows (NACS), who also owns Fort Wayne Shows in Martinsville, IN. “We’ve all had to be very creative in getting into the business, using everything from borrowing on your house to holding down a second job while you launch a show. So besides a few really big players, most of us aren’t looking for financing from others.”

NACS’ membership has been strong over the past two years. “So far, we haven’t seen any significant downturn in existing shows,” says Tejera. “Travel is a minimal part of our events. People are spending money. It’s incredible and amazing, and it makes you wonder about all you read in the newspapers.”

Tejera’s own home shows are experiencing exhibiting companies that want more space. Another NACS member in Washington state reports that his RV and boat shows are also up, as do members on the East coast.

Whether exposition producers are lucking out in the consumer markets or struggling to serve their business audiences, they continue to get the funds they need to stay afloat. The economy may yet be weeks or even months away from recovery, but most show managers believe they’ll be around to see the cycle change for the better.

“The money is always out there,” Shomer says philosophically. “The question is who has the ability to go out and resource it.”

Michael & Linda Kephart Flynn, frequent EXPO contributors, write about a variety of business and general interest topics from their base in Kansas City, MO.