Battered magazine publisher American Media is inching closer to a deal that would turn over a substantial amount of the company to creditors and deal another blow to its private-equity owners, according to sources familiar with the deal.
While talks are at a sensitive stage and could still fall apart, American Media’s owners, THL Partners and Evercore Partners, are working on firming up a deal that would reduce the publisher’s debt by around $200 million and hand a sizable minority equity stake in the company to its lenders, sources said.
The publisher of Star Magazine and The National Enquirer faces an insurmountable cash crunch next February unless it renegotiates $415 million worth of junk bonds.
As part of the deal being contemplated, the company would extend the due date on the bonds by five years, sources said.
The South Florida-based company has seen its revenue and cash flow increase so far this year mostly from cost cuts, but a slowdown in the advertising market and general economic malaise could easily reverse those gains.
Indeed, THL recently valued its 58 percent stake in American Media at a mere $73 million – half of what it said the investment was worth at the end of 2007, according to the firm’s first-quarter report to investors.
The stake is a far cry from THL’s original $293 million investment made in 2003. What’s more, a deal with creditors would likely cut the value of THL’s stake in half again.
THL has ascribed an enterprise value to American Media of about $1.14 billion, including debt, according to the report.
“They would be hard pressed to sell the company for that amount,” said one analyst.
American Media boss David Pecker has tried to combine the company with billionaire Ron Burkle’s Source Interlink Cos., but the two sides were never able to reach a deal.
AMI spokesman Richard Valvo had no comment.
American Media’s bondholders formed a committee about four months ago and hired Credit Suisse Group to negotiate a restructuring agreement.
While talks are proceeding, sources cautioned that there are issues that still need to be worked out and a deal may not be reached. In that case, American Media is likely to end up in bankruptcy court.
While bond investors expect a deal soon, THL and Evercore are known as tough negotiators that aren’t shy about fighting things out in court.
Last year, THL and Evercore worked out a deal with creditors to avoid bankruptcy for a printing company they owned called Vertis Inc. But that deal, which involved a merger with another printing company called American Color fell apart. Vertis ended up filing a pre-packaged bankruptcy which may ultimately include a merger with American Color.