September 27, 2019

Vox Buying New York Media Shows Pains of VC-Backed Media Valuations

A barbell has developed in media. You’ve got very large media brands on one side and on the other, you’ve got niche media. Both of these appear to be doing rather well. But in the middle there are a lot of media businesses that are not in a great place.

They’re more generalist than niche. They require the same infrastructure as a much larger company, but these costs come at a greater percentage of revenue than those at true-scale. And they’re unable to get ever larger deals because they don’t have the necessary scale.

Growth for the majority of these VC-backed media brands has petered out. When growth stalls for these media brands, which are all smack in the middle of the barbell, they’re suddenly forced to start thinking really hard about how to achieve success. They’re not large enough nor are they niche enough.

So, when that realization finally appears, there are only two choices:

  1. Achieve profitability and accept that your valuation is asinine, making it unlikely you’ll ever get acquired at that number.

  2. Find complementary businesses that you can acquire to give you more scale while spreading the costs of that infrastructure across more properties.

Vox is really going to try for #2 and its latest move, the acquisition of New York Media, is a strong first step.

The New York Times broke the wedding story.

On Tuesday, Vox Media agreed to acquire New York Media, the company behind the biweekly print magazine and five popular online offshoots, in an all-stock transaction. Neither company would disclose the value of the deal.

“No one had to do this,” Pamela Wasserstein, the chief executive of New York Media, said on Tuesday. “It’s a brilliant, in our view, opportunity, so that’s why we leaned into it. It’s not out of need. It’s out of ambition.”

The first thing many people noticed was that this was an all-stock transaction. All-stock deals can be tricky because as the acquired, you’re stuck holding equity in another company, so you never really cash out. It is less a problem if you’re bought by a public company because there’s liquidity with the shares. Vox isn’t a public company.

It was surprising that there were no other potential buyers that would be willing to spend cash. Or, if there were, that Wasserstein still opted to take the all-stock deal. I have two theories on this:

  1. There were really no cash deals available at a valuation that Wasserstein would feel comfortable with.
  2. There were cash deals, but based on conversations with the buyers, it was clear that a lot of people were going to lose their jobs.

This is pure speculation, but it seems that Wasserstein got the best valuation she could with a brand that wouldn’t want to let go of the editorial teams like so many other acquirers do.

We’ll get to the dynamics of this deal in a bit, but as the headline of this post says, this deal shows the cracks in media valuations.

The Wall Street Journal was able to find information on the valuations of the deal.

Vox Media’s acquisition of New York Media values the New York magazine-parent at about $105 million, according to people familiar with the situation, and is aimed at creating a more well-rounded player in digital media.

Vox Media was valued at about $750 million in the deal, the people said. The company was valued at roughly $1 billion in its latest funding round in 2015.

The Journal went on to report that New York Media would own roughly 12% of the combined company with Vox Media’s shareholders owning the rest. That gives the company a post acquisition price of $855 million.

For New York Media investors, this is a good deal. Bruce Wasserstein, Ms. Wasserstein’s father, bought the magazine back in 2004 for $55 million. 15 years later, the family sold it for nearly double.

It was also a deal New York Magazine had to take. Despite a jump in revenue, it was reported by The New York Times that New York Mag “was losing as much as $10 million a year.” And even after that growth in revenue plus a 5% reduction in staff, it continued to money. New York Media was stuck squarely in the middle of the barbell.

For all intents and purposes, this is a good deal for New York Media.

It’s also a good buy for Vox, but it’s a deal that comes with them having to take one step back. As the above block-quote says, they last raised in 2015 at a $1 billion valuation. The pre-money valuation for Vox in this deal was $750 million, which means that investors are underwater by 25%.

The good thing for Vox is that it might be profitable. The New York Times reported “after expanding its [Vox’s] video and podcast businesses, the company had a modest profit on $185 million in revenue last year.” And Vox intends to remain profitable even with this deal despite the promise that there would be no budget cuts to editorial.

In my eyes, that’s key to this deal working.

Many acquisitions are just bizarre financial plays where you try to “create synergies.” But the supposed synergies always target the editorial teams. That’s not the way to do it. People read our publications because of our editorial teams, not the back office. It’s a good sign that they’re not going to make cuts to editorial.

That doesn’t mean there won’t be cuts, though. Each company has marketing, HR, finance, accounting, technology, and a variety of other teams. Both companies have their own content management systems that they’ve built out—Chorus and Clay—which seem redundant now. Therefore, on the business side, you can imagine there will be some consolidation. That’s to be expected.

Ultimately, Vox investors had to take a step back, but in the long-term, this should work out for them. They’re bigger now, which will help, with sources telling The New York Times that Vox Media expects to make $300 million in revenue in 2020. And they can spread out costs.

Strategically, it made sense…

All of that barbell talk aside, this deal makes sense from a strategic perspective. Each business brings distinct revenue opportunities that the other really didn’t have. Despite both running a network of sites, there’s very little overlap.

Joshua Benton over at Nieman Lab (who honestly wrote a way better piece about this acquisition than I ever could), broke down how little overlap there is:

Given that the same few verticals seem to pop up across media companies — everybody gets a tech site! — it’s remarkable how little content overlap these two companies bring. New York doesn’t do sports like SB Nation; Vox Media doesn’t do entertainment like Vulture. and New York’s Intelligencer both cover politics, but in complementary ways. There’s some overlap in tech and fashion/style, but less since New York stepped back from Select All and Vox Media folded Racked.

Brad Skillman points out one narrow editorial overlap I missed: New York’s Grub Street covers NYC restaurants, as does the NYC subsite of Vox Media’s Eater. But New York is only one of Eater’s 24 markets.)

On the revenue side, they have complementary business models that each can benefit from.

Vox Media derives the bulk of its revenue from advertising both on its owned & operated as well as with Concert, its premium ad marketplace. Vox Creative, its studio, also has strong production capabilities both for clients as well as the portfolio of sites.

New York Media used to make 85% of its revenue from advertising, but has been able to diversify enough into e-commerce (which Vox desperately needs) and subscriptions so that now only 60% of its revenue comes from advertising.

Another point that’s worth mentioning also comes from Benton:

When the digital publishing business was mostly about advertising, the purpose of moar scale was primarily about cutting backend costs and being able to do deals with a higher grade of advertiser. But as it shifts more toward subscription, moar scale is also about assembling a big-enough and diverse-enough bundle of content to appeal to a bigger audience. Sites have gotten pretty good at getting their superfans to buy a digital subscription. But there aren’t enough superfans. Yes, there are people who loooooooove The Cut. But there are probably more who only like The Cut — and also like Vox and The Verge and Vulture.

I talked about this in my piece about The Athletic’s valuation.

The Athletic raised a bunch of money so that it could hire the best writers in a specific league. That then makes it possible that subscribers are not only interested in their team, but also the league overall. That makes it easier to stomach spending $60 a year on sports content. The problem is you can’t bootsrap that model because “writer’s salary needs to be paid immediately, while subscription revenue accumulates over time.” Thus, the need to raise money.

New York Media brings subscription chops to the table. It has figured out how to get people to pay for content, but like Benton said, there are only so many superfans. By making the network so much larger, you can likely convince more people to fork over some money to get access to a lot more content.

For generalist news publications, bundling is likely going to be one of the ways you can get subscription dollars. To be clear, I don’t mean bundling with Apple News+; I mean bundling with your own network of sites.

What comes next…

Vox is also still stuck in the middle of the barbell despite this deal. It is certainly growing larger, but it still has a ways to go.

I fully expect Vox to continue purchasing other complementary businesses over the next couple of years.

Flashes & Flames has a theory on what could come next:

He [Vox CEO Jim Bankoff] might look no further than Time Out, the London-based magazine brand which launched in the same year as New York. After almost a decade of post-digital financial pain, Time Out (which has long been been a global youth brand with its city guides and magazines) launched a food market in Lisbon in 2014 bringing “the best of the city under one roof: its best chefs, drinks and cultural experiences”.

It’s an ambitious roll-out of a clever concept (just go and see a Time Out market). It is reasonable to speculate that the strategy will lead Time Out Group Plc to divest its loss making print-digital magazine interests. The markets are branded Time Out and (sort of) use magazine editors to “curate” the choice of pop-up restaurants. But sustained success may persuade Time Out to sell or licence-out its media to a strategic partner which could leverage the media brand digitally and globally.

New York Media was already expanding internationally with a UK site for The Strategist, which launches next month. If that goes well, it’s likely other brands would also get local editions overseas.

Purchasing the media operations of Time Out would give Vox a sudden jolt to its international goals. It would give the brand additional scale to get it out of the middle of the barbell.

Summary: All in all, this is a good deal for all parties involved. Vox investors had to take a 25% haircut to their recent valuation, but to be honest, it was never going to survive at that valuation. It’s a buyer’s market in media today. Take the haircut, buy a great, complementary business, and work to achieve that valuation. I fully expect more acquisitions, but let’s see the Vox-New York honeymoon continue for a bit.