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Demand for celebrity news is at a fever pitch

NEW YORK – Brangelina! TomKat! Britney and KFed!

Americans have an unquenchable thirst for celebrity gossip. Mainstream media organizations do their best to keep the public informed about such earth-shattering news like baby birth announcements and divorces.

But when it comes to reporting about idle Hollywood chit-chat, one company is a clear leader: American Media. The privately held company publishes celebrity news magazine Star and supermarket tabloids The National Enquirer and Globe as well as popular fitness magazines Shape and Men’s Fitness.

Given that more people appear to be interested in whom Paris Hilton is dating than labor unrest in Paris, France, now would seem to be a great time for American Media to try and test the public waters, right?

Sure, the magazine publishing business has its challenges — according to figures from the Publishers Information Bureau, ad revenues for magazines through April are up 4.5 percent from a year ago. But many of American Media’s celebrity and fitness magazines have experienced double-digit growth in ad sales.Pssst….new management could be an IPO hint

So it may make sense for the company’s two owners, private equity firms Thomas H. Lee Partners and Evercore Capital, to finally try and cash in on their investment. The two firms acquired American Media in 1999 and seven years is considered an eternity for private equity shops.

“Lee and Evercore have been in the deal long enough that they are probably looking for an exit. An initial public offering is logical for them to consider. The timing makes sense,” said Reed Phillips, managing partner with DeSilva & Phillips, an investment bank for the media sector based in New York.

Executives from American Media were not available for comment but the company does appear to be taking steps that bring it closer to an IPO. It has hired key financial executives with experience at public companies.

In December, the company hired Carlos Abaunza, most recently the vice president of strategic planning for the Miami Herald and before that the corporate controller of the Herald’s parent company Knight-Ridder (Research), to be its chief financial officer. In the press release announcing that hire, the company said Abaunza would be “involved with investor relations as the company moves toward an eventual public offering.”

And earlier this week, the company announced that Saul Kredi, previously the corporate controller for publicly held tech consulting firm Answerthink (Research), was joining American Media as its chief accounting officer.

Jack Hanrahan, the U.S. director for print at OMD, a media buying agency owned by Omnicom (Research), adds that the hiring of John Miller as president and COO earlier this year is also a plus. Miller formerly worked at magazine publisher Hachette Filipacchi with American Media’s current CEO, David Pecker.

“This hiring is a good sign. He’s a strong manager who knows the publishing business inside and out,” said Hanrahan.

American Media also recently unveiled a new corporate Web site, which the company described in a press release as a place where advertisers, subscribers and investors can go to find information about the company. The company does already have publicly traded debt and as such, files statements with the Securities and Exchange Commission.Shocking debt!

Still, an IPO is far from a slam dunk. Hanrahan said The National Enquirer has not been able to benefit from America’s celebrity obsession. He said it continues to be a disappointment (ad revenues are down this year) despite the efforts of editorial director Bonnie Fuller, who was hired by American Media nearly three years ago.

“That publication has been saddled with some baggage and nobody has been able to crack the code,” Hanrahan said.

In addition, the company is saddled with nearly $1 billion in debt and is in the midst of a restructuring. In April, American Media announced it was shutting down Celebrity Living Weekly and two other publications and laying off 9 percent of its workforce in order to cut costs.

The company also said in February that it was going to restate results for fiscal 2005, which ended in March of that year, as well as for the first two quarters of fiscal 2006. As such, the company has yet to file results for the final two quarters of fiscal 2006. American Media has said it expects to file the restated results by June 28.

Richard Dorfman, managing director of Richard Alan Inc., a financial advisory and investment company focusing on the media industry, said that the looming restatements are a problem that potential equity investors would frown upon.

With that in mind, Dorfman said the recent hiring of a new CFO and controller may not signal an imminent IPO.

“Maybe the company brought in those guys because they needed a world-class financial team to clean things up and increase confidence,” he said.

But American Media’s financial problems could actually wind up being an impetus for an IPO, according to Ken Meehan, the editor of Debtwire, a news service focused on distressed debt securities.

Meehan said that American Media’s debt covenants with bondholders are restrictive and could make it difficult for the company to fund future growth opportunities. One way out of this situation, however, could be paying down the debt.

“The company would probably be very keen on getting out of the debt covenants or paying the debt down. How can you get the money to pay it down? One of the ways is an IPO,” Meehan said.

Still, Dorfman added that American Media also needs to spruce up its online operations in order to become more attractive to investors.

“Publishing is a relatively stagnant business. The company would not be a hot IPO unless they really take off on the interactive side or with wireless,” he said.

There’s also a lot of competition, particularly on the celebrity news side from the likes of Us, InTouch and People. (People, like, is owned by Time Warner (Research).)

But Hanrahan thinks that American Media should be able to build on some of the recent success at Star, despite increased competition from publications. After all, people need to know all they can about Shiloh Nouvel Jolie-Pitt.

“Star is in a category that’s defying a lot of people’s expectations,” Hanrahan said. “It’s not like consumers go into supermarkets and say I’m only going to buy one tabloid. There is a core group of people who just can’t get enough of celebrity journalism and will buy multiple magazines.”


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