Willis Stein to Ziff’s Rescue

By Erin Joyce

Technology magazine publisher Ziff Davis Media Inc. and its majority shareholder Willis Stein & Partners III have patched up their differences in a major restructuring that includes $80 million in cash and a 60 percent write-down on its junk bonds.

The deal could help ensure the survival of Ziff Davis Media, which has teetered on the edge of bankruptcy after the collapse in tech-based advertising dried up its cash and its debt levels loomed.

But whether it can overcome “going concern” statements peppered throughout its annual report (which it filed before the restructuring deal was announced) remains an open question.

“Because of our recent operating results and substantial indebtedness, our audit report expresses substantial doubt about our ability to continue as a going concern,” the company said in its annual report.

“Our earnings were insufficient to cover our fixed charges by $370.2 million and $15.8 million for the nine months ended December 31, 2001.”

The two companies said they worked out a restructuring deal that frees Ziff up from its twice-yearly interest payments on $250 million worth of junk bonds and reduces the value of those senior subordinated notes by $155 million, or just over 60 percent.

As a result, $250 million worth of debt is now worth $95 million on the balance sheet of Ziff Davis Media, the publisher of PC Magazine, Yahoo Internet Life and CIO Insight. It also got an $80 million cash infusion from Willis Stein & Partners.

Avy Stein, a partner in the investment firm Willis Stein, said he was pleased with the result of the restructuring. “It puts the company back on solid footing and restores it to its rightful place in technology, gaming and media,” he said. “We intend to shore up that base and grow from it.”

That’s putting it mildly, given that Willis Stein & Partners, which acquired Ziff for $780 million in cash in 1999, has helped to write off over half of Ziff’s debt load.

“The whole idea with this is that (Ziff) is a very strong company with terrific assets and a fabulous management team. The company needs to get the debt down so it can survive this horrible market and come out ahead,” Stein said.

Ziff, which relies mostly on advertising revenues from its tech publications, has been hammered by the downturn in advertising that has rocked the publishing industry for the past two years.

For the fourth quarter of 2001, Ziff’s revenues were $74 million, a 41 percent drop from the revenues of $126 million during the same, year-ago quarter.

For 2001, its net loss was $415.7 million on revenues of $224.6 million, largely driven by restructuring charges as it closed down operations, scaled back publications and slashed costs wherever it could. During 2000, Ziff’s net loss was $28.8 million on revenues of $353 million.

For the past nine months, Ziff Davis listed overall debt of about $441 million. Cash paid out to service that debt during the same time frame was $36 million.

As a result of the latest deal, Ziff Davis gets a pass on some of its interest payments for about four years. It also marks the third time in the past six months that the New York-based company has been pulled back from the abyss.

In March, it was on the verge of missing a $15 million interest payment due on the $250 million bonds when it worked out a forbearance agreement with bank lenders. That deal freed up some cash to help it make its twice-yearly $15 million interest payments.

Prior to that, the company had slipped into technical default in October of 2001 on its $180 million revolving credit facility and was forced into negotiations with more than 50 banks headed by principal lenders CIBC, Deutsche Bank Alex.Brown, and Fleet Bank. Since then, rumors have swirled that the company was heading for a bankruptcy filing. But now that investors have agreed to swallow some of their value on the bonds, Ziff Davis has received a new lease on life as it works to right the corporate ship.

Holders of Ziff Davis Media’s senior notes are also being offered about $30 million in cash, $95 million in new Payment-in-Kind (PIK) senior subordinated notes issued by Ziff Davis Media Inc. as well as shares of a series E preferred stock and warrants for the purchase of common stock of Ziff Davis Holdings Inc., the companies said.

The companies also said Ziff Davis Media’s existing bank credit agreement would remain in place with certain anticipated modifications to be negotiated.

Robert F. Callahan, chairman and CEO of Ziff Davis Media, said, “When the new management team joined the Company six months ago, we focused on two missions: improving our core assets in technology and game publishing and restructuring our balance sheet. These agreements with our equity sponsor and bondholders represent a major step forward in our efforts to complete a financial and operational restructuring.”

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