Forbes has just published another “let’s attack Alwaleed” article. For those keeping count, this is the fourth one in the last couple of months. The most significant one was a +4,000 word anti-Alwaleed rant in March that resulted in a libel action against the company and the author.

Meanwhile, Bono, who had a great success with his Facebook investment, has watched his large investment in Forbes crash and burn. The terms of the 2006 investment, made by his private equity group Elevation Partners, have not been publicly disclosed. But Fortune Magazine reported it was a $237M investment for 45% of the company. That would mean a 2006 valuation of $500-600M. By 2011, the Daily Mail was reporting that Forbes was worth only $100M. Ouch.

So Forbes’ fairly spectacular decline has become a bit of a problem for two individuals who coincidentally happen to be prominent and large-scale media investors. These two should talk. There’s an interesting turn-around opportunity here – and its past time for some big boys to take charge.

As for Forbes’ continued Alwaleed attacks, I am baffled by what management is doing. The company appears cash strapped. They have been selling off assets like crazy. And according to Fortune Magazine, they went into “technical default” on a large loan as recently as 2010. So why exactly are they attacking one of the largest media owners on the planet? Did management really need a lawsuit right now? Maybe those trips to London’s High Court will be a nice break from creditor meetings.

And here’s the real irony. After 96 years of operations, Forbes is maybe one more big mistake away from dead. Maybe they will survive. Maybe not. But I don’t think surviving as a small company in a difficult business is what Bono and his team had in mind when they wrote a $237M check. Turning Forbes back into a major media company is the goal – and that will require far more than good management and some organic growth.

What Forbes needs are partners with media assets, deep pockets and serious deal making ability. That is people like Bono, Elevation Partners and Alwaleed. So here’s the irony, Forbes has gone out of its way to pick a fight with one of the few people who could actually save them.

Keep in mind; Alwaleed is not just a big media investor (News Corp, Time Warner, Rotana, etc.). He is also one of the most successful turn-around experts of the past 25 years. It was his distressed acquisition of Citibank in 1991 that made him famous. And when he first purchased the Fairmont Hotels, it had only four hotels and a brand name. Today, it is the world’s largest luxury hotel chain. Euro Disney, Canary Wharf, the Four Seasons Hotels. The list goes on and on. There is a reason why he is called the Prince of fallen angels. Isn’t this exactly what Forbes is praying for?

It appears that Forbes’ new CEO has stabilized the situation. But what Forbes needs now is larger moves. It needs partners who have the ability to raise hundreds of millions of dollars – and who can do mergers and joint ventures globally. That’s how you double or triple the revenue in a couple years.

Alwaleed, Bono and Elevation Partners should just take this thing over. The truth is if they can’t pull Forbes back up to the big leagues, then it probably can’t be done.

 

A couple of questions and comments:

How Much Can You Sell a Glass House for Anyways?

I’ve been digging into Forbes’ financials, especially their asset sales. It’s really unbelievable how far this company has fallen. For them, in the midst of their decline, to be writing such silly attack articles about rapidly rising Alwaleed is the height of hubris. I’d make a comment about people in glass houses throwing stones, but I’m pretty sure Forbes has already sold off any glass houses they owned.

 

Forbes’ Decline Has Been Spectacular, Like Meteor-Across-the-Sky-in-Siberia Spectacular

Forbes was once, without question, one of America’s leading media houses. For fifty plus years, their print magazine was a must read for the business community. And the company lived a Great Gatsby-like existence. They had a Fifth Avenue headquarters, a jet, helicopters and luxury assets around the world. Even today, Steve Forbes still has a presence on the national political stage by virtue of this legacy. The Forbes name in many ways has been synonymous with American capitalism.

But almost a hundred years after its founding, Forbes is now a shadow of its former self. Over the past decade, the Forbes family has been systematically selling off assets. Their massive ranch in Colorado was sold to hedge fund manager Louis Bacon. Their island in Fiji is gone. Their custom Boeing 727, the helicopters, the palace in Tangier, and even the world’s largest private collection of Faberge eggs are all gone. And just this month, their famous Highlander Yacht, on which Malcolm Forbes entertained Presidents, was put up for sale (asking $11.5M). Note to Alwaleed: If you want to give Steve Forbes a seizure, buy the yacht and give it Fortune Magazine.

But the one asset the family never sold was Forbes Media, the business at the center of their empire. That changed in 2006 when they sold 45% to Bono’s private equity firm Elevation Partners. That is the decisive indicator of their real situation. Nobody sells 45% of the family business and legacy unless they absolutely have to, they are looking for an exit or they are playing the market. I don’t think they were playing the market.

Fortune Magazine reported that the Elevation Partners deal was for $237M, and $107.4M of that went to the family. In his book, The Fall of the House of Forbes: The Inside Story of the Collapse of a Media Empire, Stewart Pinkerton described the deal as “the family’s first step in its own exit strategy.” $101.8M of the money was reportedly used to pay off debt, $38.9M went to the redemption of warrants and $41.4M went to the balance sheet as cash. $22.7M went for fees (10% for fees?). And importantly, a $90M revolving credit facility was set up. This is the loan that would cause them serious trouble in 2010.

This deal strikes me as a Hail Mary pass, something to launch them out of a sub-scale position in a difficult and declining business. People like Hail Mary passes because they feel bold. But they are risky. And they totally depend on who the the quarterback is. I would have bet against it succeeding for Forbes. And unfortunately, the result was a difficult but not urgent situation became much worse.

Forbes’ core business has been in trouble for some time. Print media has declining ad revenue. And living off of internet ads is a precarious existence. So raising money and building a war chest was a pretty good idea. It buys you time and gives you options. Taking on debt in such a situation seems to me a very bad idea. But I don’t have have the details on what Forbes did with their debt and why, so I don’t have an opinion on that.

I think what was clear in 2006 was that organic growth and cost cutting wouldn’t be enough. Mergers and acquisitions were the key. They needed to do some deal making and turn themselves into a business with better economics. Think AOL buying Time Warner.

But expansion and business transformation by m&a is very difficult. Rupert Murdoch is exceptionally good at this. I don’t see a great track record at Forbes. And as it turns out, the recession (and their debt) threw them into crisis pretty quickly anyways.

The period from 2009 to 2011 was arguably their most difficult. Summarized from a Fortune Magazine article:

• The company went into “technical default on some $90 million worth of revolving credit”.
• Turnaround specialists Alvarez & Marsal were brought in.
• JP Morgan and six other lenders agreed to amend the loan but with some conditions. One of three things had to happen: the sale of Investopedia, the replacement of Steve Forbes as CEO; or the achievement of certain financial targets.
• Forbes Media sold Investopedia for about $40m. This was just three years after they bought it.
• Steve and Tim Forbes exited as CEO and COO.

In 2012, Forbes set out to refinance a $50M loan due in July. What was noticeable was they hired PrinceRidge Group. The New York Post reported that none of the half-dozen banks that handled the restructuring wanted to be involved.

Also during this period they continued to sell off assets. In 2007, they put their historic Fifth Avenue headquarters up for sale. It was finally sold in 2010 for $65M, a +50% discount from their initial asking price. Who sells in the middle of the worst financial recession in fifty years? And accepts a +50% discount?  Someone who absolutely has to. This would repeat itself in 2012 when they sold the famous Forbes townhouse in Greenwich Village for $7.5M, at another +50% discount from initial asking price.

 

And It Actually Gets Even Worse

Because underneath all this selling, refinancing and crisis management, the core business appears to have contracted. Fortune Magazine reported that Forbes’ operating income in 2010 was only $2.7 million. The New York Post reported that in 2011 Forbes EBITDA was up to $10.7 million – but on revenue that had declined to $125 million. If true, this is a massive drop in revenue from the almost $200M they had in 2006-7 (source: Fortune Magazine).

So I repeat my initial question: What in the world is a company in this situation doing picking a fight with a billionaire? And, god forbid, what happens if he wins a large judgment against the company? Could he actually end Forbes?

All of this has been a fairly brutal ride for Bono and Elevation Partners, both financially and in terms their reputation. Their reported $237M investment is possibly down to around $40-50M (assuming the $100M value reported and no other clauses). And there were some unpleasant articles written about them in 2010, partly because of this situation.

Fortunately, they have had some spectacular recent successes, like their Facebook investment. And to their credit, they appear actively involved in the Forbes situation. A lot of investors would have walked away. In fact, they appear to have been a driving force behind the emergency measures to get Forbes back into the good graces of its creditors. The actions of Bono and Elevation Partners here are pretty admirable.

 

The Good News: Forbes Is Down but Not Out

There are a couple of attractive things here that should catch Alwaleed and Bono’s attention. And raise the possibility of a potential turnaround. In particular:

• The Forbes brand. It is an American brand that carries serious weight in business publications. It is also uniquely global, much more so than most of its competitors. People know Forbes everywhere from Indonesia to South Africa. The brand could be extended to other media products and services, especially internationally.

• The Forbes website. The Forbes.com webpage is cited as one of the top five business sites. Its Alexa ranking is similar to the Wall Street Journal domestically and is actually much higher internationally.

• The Forbes Magazine. This worries me. Circulation appears stable around 900,000, slightly above competitor Fortune Magazine. But revenue is falling for most of print media.

My impression is that Forbes has some attractive assets – but it needs to get on a bigger platform or find some serious financial backing. I question whether it still has the economic scale to seriously compete as a stand-alone media company.

 

What Forbes Needs to Rise Again

Alwaleed has never gone hostile in any of his Western projects. Not once in +20 years. His approach is to be the partner that everyone wants at the table. So his standard question is “what do they need?” And then he provides it. You want a joint venture with News Corp, a franchise deal in South Africa or a consortium of billionaire backers like Bill Gates and Larry Ellison? He’s your guy. And he is exceptionally good at this. It’s why he is also called the Prince of deals.

If the goal for Forbes is to become a much larger enterprise, my impression is that they need three things:

1. Long term, stable financing

In distressed situations, management is always consumed with refinancing debts, getting bills paid and keeping nervous staff from jumping ship. That makes it hard to really focus on growth. And for sure, you have no ability to take the near-term losses that are almost always required for future growth.

Deep pocket, long-term investors like Alwaleed and Bono can solve this problem. These are not short-term PE players. They are not owners who need or want to take cash out soon. They can give management the stability and resources to focus on growing economic value over time. And that is a pre-requisite for building a large business (and getting the right price in a sale).

2. Value-added deal making

This is what Forbes needs more than anything. It needs more revenue and more operating cash flow. Organic growth is unlikely to move the needle that much. Or at least I wouldn’t depend on that happening. They need to do mergers, acquisitions and joint ventures that can double or triple the revenue in 2-3 years. Fortunately, this is Alwaleed’s core skill. It is exactly how he built his fortune in the West and internationally.

3. A Restructuring of Ownership

Distressed situations are not for the faint of heart. And they are definitely not for the small. This situation needs big boys to take control and commit long-term. That’s the path back.

Bono and Evolution Partners are big boys. They make large investments ($300-500M) in media companies. But they have been invested in Forbes for six years. And partners Roger McNamee and Bret Pearlman have already done stints on the Forbes Media board. I suspect they are getting tired. My guess is they would probably welcome a new partner with new energy – especially if he can offer a path to a real return.

Fortune Magazine reported that Forbes holds a call option to buy back Elevation Partners’ 45% ownership at fair market value, anytime after August 4, 2011. I’m not sure if this is true (Fortune’s cited source is a footnote in Forbes’ 2010 financial statements). But if so, that could be trouble for Evolution Partners given the company’s current value. But Elevation Partners also might have an escape clause. Fortune reported that they have a put option between 2011 and 2016 at fair market value – and after it expires, they have a 90-day window during which they can sell their stake back at the original price. So the ownership situation in the next couple of years is a bit unclear.

 

Could Forbes Be Bought for $10M?

I’m not joking. This company is not flying with a lot of altitude. They could fall back into crisis. And if they do, are the current owners willing or able to put in more capital? So how much room for error does the company have today? For example:

• What happens if the core business continues to decline? What happens if revenue drops to $90M?
• What happens if something unexpected happens? What if another recession starts? What if ad pages drop 30% (wait, didn’t that happen in 2009)? What if they lose a big defamation lawsuit?
• And what if a big, well-funded media company sets its sights on them? Could Forbes survive a sustained price war for its largest advertisers?

Recall Forbes’ long-time competitor Business Week faced a similar decline in 2005-2009. And when the recession hit, their revenue was knocked down to around $80M ($60M for print, $20M online). They were sold to Bloomberg in 2009 for under $10M (and the assumption of liabilities). Food for thought.

 

A Final Question for Forbes Management

Seriously, what exactly are you doing with these stupid “attack Alwaleed” articles? Did you really need a lawsuit to deal with this year? (I’m sure Elevation Partners was thrilled by the news).

Actually, that’s not my real question. What I am dying to know is: How much cash does Forbes have left? I’ve been looking at the earnings, asset sales and debt refinancing. I’m really curious what the net balance is. That would be the question I would ask if I had management under oath.

 

An important note. I have had no contact with Kingdom Holding Company (KHC) for this article. And I have not been part of any discussions (legal or otherwise) at KHC. I am 100% independently speculating and commenting here.