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Net investments put Primedia in a financial hole

Two years ago, Henry Kravis, left, a founder of Kohlberg Kravis Roberts, chose Tom Rogers to bring Primedia Inc into the digital age. Now the company is struggling to bolster revenues as advertising in its publications withers. PHOTO: NY TIMES

Two years ago, Henry Kravis chose Tom Rogers of NBC Cable to bring Primedia Inc into the digital age. Rogers promised to remake the "sleepy little media company," the publisher of Seventeen, New York and American Baby magazines.

Under his leadership, Primedia went shopping for businesses such as Powerful Media and About.com, and invested in Brill Media Ventures, Liberty Digital and CMGI. Of all those investments, the only one that still wins praise is its US$515 million purchase of Emap, an old-fashioned magazine publisher.

Now the company is loaded with debt and struggling to bolster revenues as advertising in its publications withers. "The company is stretched extremely thin and can't take the risk of further missing numbers over the next year," said Peter Appert, an analyst with Deutsche Banc Alex Brown. "So it needs to sell assets."

Primedia's stock has plunged from a high of US$34.875 a share on March 31, 2000, to US$2.06. Kravis, whose firm, Kohlberg Kravis Roberts, owns 67 percent of Primedia, completely supports Rogers, his spokeswoman said. But the company appears to be scrambling to sell, close or shrink businesses.

"The company has debt of US$2.6 billion. If you sell it today, you are just covering your debt."

Davis Allen, a debt analyst at Morgan Stanley

"It's going back to being a magazine company," Appert said, "and that is probably good."

Breaking up Primedia in its entirety probably would not generate much profit now for Kravis' firm. Davis Allen, a debt analyst at Morgan Stanley, estimates the company's assets are worth US$3 billion. "The company has debt of US$2.6 billion," he noted. "If you sell it today, you are just covering your debt. The challenge is to control the dot.com costs and grow ad revenue; then sell it."

Kohlberg Kravis Roberts has not yet made a profit on its Primedia investment, which was begun in 1989, according to a person close to the company. The investment firm is estimated to have put up less than US$1 billion in all -- a third of its investment in RJR Nabisco -- but Primedia remains one of its largest commitments, a person familiar with the firm's investments said. Neither Rogers nor Kohlberg Kravis Roberts would comment.

Rogers, who is credited with creating NBCi as president of NBC Cable, seems to have been enthralled with the Internet. Some of his acquisitions were made as the air was leaking out of the Internet bubble, and these acquisitions continue to generate losses.

Chip Block, publishing strategist at Ziff Davis Media, said, "They were late to the Internet party when it was evident that the bloom was off the rose."

Brill Media Ventures, which is 49 percent owned by Primedia, is one of the disappointments. On Monday, the company said that it was shuttering Brill's Content and selling its Web site that tracks media news, Inside.Com, to Primedia for an undisclosed amount.

Rogers struck the deal to invest in Brill in January, even though the magazine had failed to make money in its three-year life. Its online business, Contentville, was also a money loser.

Turning off the spigot at Brill is probably just the beginning for Primedia. Though the company might have trouble finding buyers for some Internet holdings, industry officials said it is hoping to sell seven magazines, including Guns & Ammo and Shooting Times, for at least US$150 million. The company has declined to comment.

In other fateful moves, Primedia agreed to swap some of its stock in March 2000 for stock in CMGI, which invests in Internet companies. That stake, then valued at US$164 million, has fallen to US$3 million. A deal with Liberty Digital, which has interactive TV operations, was once worth US$25 million, but now is valued at less than US$2 million.

In November, after most Internet stocks had plunged, Primedia agreed to acquire About.com, a Web site offering information on 700 areas of interest. The stock purchase, valued at about US$374 million, worried investors because online advertising was plummeting.

Primedia's losses widened to US$140 million in the quarter ended June 30, from US$7 million a year earlier, though the company said revenues grew 4.7 percent to US$445 million.

The losses were compounded by a series of deals struck with troubled dot.com companies. For example, Primedia swapped advertising inventory in its magazines and Internet sites for stakes in small Internet companies, company reports show. Primedia booked about US$46 million in revenues during the first half of 2001 from this method and reduced cash flow from operations by about US$30 million. Ultimately, those deals proved costly because the equity stakes in the Internet companies plunged in value, forcing Primedia to write down the assets. Those declines contributed to writedowns on investments of US$30 million in the first half.

Primedia made an even more complex deal with About.Com. After it had agreed to a stock swap for the Internet company in November but before the deal was completed, Primedia changed the terms. It agreed to give fewer shares to About.com shareholders and to give About.com US$26 million of advertising inventory. Primedia has said the arrangement let it begin promoting About.com even before the deal closed. The arrangement also allowed Primedia to show higher revenues.

Though such deals are not unusual, "traditionally media companies do it on a small scale," Appert said.
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