HE WANTS MACMILLAN, AND HE WANTS IT BAD
Bill Reilly doesn't want to be known as the Captain Ahab of Corporate America. The 54-year-old publishing executive is a charming fellow with an easy laugh who likes to read Aristotle for fun.
Stand between him and the Macmillan Inc. publishing house, though, and you're likely to be harpooned. William F. Reilly badly wants to buy Macmillan, which went on the block recently after the collapse of its parent, Maxwell Communication Corp. In the almost nine years Reilly was president of Macmillan, he turned the creaky publisher into a powerhouse. But in 1988, he lost a bitter takeover battle with British media baron Robert Maxwell. Reilly didn't stay long under the flamboyant new owner.
Now, Macmillan is up for grabs again. And Reilly is flush with backing from Kohlberg Kravis Roberts & Co., the powerful leveraged-buyout firm that owns 87.2% of his company, K-III Communications Corp. The trouble is, K-III's chairman can't shake a perception that he's on a personal crusade to win back the company: "Even KKR thinks that," he admits. "But they're wrong. Once you start doing things for ego reasons, you get yourself into real trouble."
Not that Reilly is bashful about his interest. He thinks he's more qualified to run Macmillan than anybody. For one thing, he lured no fewer than 45 Mac-millan executives, including his entire management team, to work for K-III. Even his corporate chef came from the Macmillan kitchen. Says Reilly: "You're much better off if you know the business and have a cadre that can run it."
BRASS RING. Reilly also believes he still has a knack for building companies. Since leaving Macmillan in 1990, he has made K-III a formidable media player (table). The company vaulted to prominence in 1991 when Reilly and KKR plunked down $650 million for Rupert Murdoch's U.S. magazines. K-III's properties now include New York and Seventeen magazines, Funk & Wagnalls encyclopedias, and the Daily Racing Form. But while K-III generates $778 million in annual sales, Reilly isn't satisfied yet: He wants a capstone for his creation.
No question, Macmillan would transform K-III from a bantam into a heavyweight. It publishes prestigious books, most recently the memoirs of former Secretary of State George P. Shultz, under imprints such as Charles Scribner's Sons and Atheneum. It has strong children's and college book divisions, and it owns 50% of a joint venture in school publishing with McGraw-Hill Inc., which also publishes BUSINESS WEEK.
But Macmillan was more than grazed by the implosion of Maxwell's empire. The company's earnings may drop 38% this fiscal year, to $38 million, on sales of $682 million, according to executives familiar with the offering documents prepared by J.P. Morgan & Co. Morgan is running the auction for the British and American bankruptcy courts. Earnings are way down at Macmillan's P.F. Collier Inc. encyclopedia division, and the joint venture with McGraw-Hill has been plagued by cost overruns.
Reilly won't discuss Macmillan's woes. But given his intimate knowledge of the publisher, he might prefer that challenge to the problems he's faced at K-III. Like other publishers, Reilly is still suffering from an advertising drought. K-III's operating income rose 8% in 1992, to $125 million. But operating income at its magazines dropped 7%, to $50.6 million. In fact, K-III's overall income wouldn't have grown at all if not for a 38.6% jump in its direct-response division, which includes book clubs.
Nor has Reilly had much luck building his profile as a magazine publisher. "He didn't come in and move the magazines off the mark," says industry consultant Martin S. Walker. Reilly bid aggressively for Bon Appetit and Architectural Digest but lost out to Cond Nast Publications Inc.'s S.I. Newhouse, who paid $175 million. The tony magazines would have burnished K-III's image, which some observers say is pedestrian.
Reilly says K-III is going through the inevitable growing pains that come with acquisitions. For example, he had to spend more than $5 million to boost the distribution and promotion of Soap Opera Weekly. Once such investments start paying off, Reilly is sanguine that K-III will gain earnings momentum.
He'll certainly need strong results to finance a purchase as big as Macmillan. Price Waterhouse, which is overseeing the sale on behalf of Maxwell's creditors, hopes to fetch between $700 million and $1.1 billion for Macmillan and Official Airlines Guide, a provider of airline schedules and fares that was also owned by Maxwell. On May 11, Price Waterhouse announced it had signed a letter of intent to sell OAG to Anglo-Dutch publisher Reed Elsevier PLC for $425 million. Morgan will consider formal bids for Macmillan some time in June.
FIERCE BIDDING. The publishing house alone could go for as much as $700 million. Texas billionaire Robert M. Bass and Paramount Communications Inc. are among the wealthy players who may bid fiercely. Paramount is especially interested in Macmillan's children's and college book divisions. The company won't comment, and Reilly is mum about what he may offer.
Whatever he bids, he'll probably need 25% of his financing in the form of equity, according to industry executives. Assuming a price of $700 million, Reilly would have to arrange for $175 million from KKR and $525 million in debt. K-III now has total debt of $700 million. With $525 million more in borrowing, 66% of K-III's total capitalization would be debt, compared to its current 52%.
Some investment bankers think KKR may be leery of a deal that requires so much equity. KKR's Henry R. Kravis has been a champion of Reilly's in the past, but that doesn't mean he'll break the bank to make a deal this time. KKR declines comment. And Reilly says he would be just as happy coming to work even if Macmillan eludes his grasp again. Honest.WHAT BILL REILLY HAS...
Key properties of K-III Communications
Magazines New York, Seventeen, Premiere, Automobile, Soap Opera Digest
Newspapers Daily Racing Form, Weekly Reader (newspaper, periodicals, and books)
Books Funk & Wagnalls encyclopedias, Newfield children's books
1992 Revenue $778 million
Income $125 million*
* Income represents earnings before interest, depreciation, taxes, and
amortization of debt
...AND WHAT HE'S AFTER
Key properties of Macmillan Inc.
Divisions Adult (trade, college, reference); children's; P.F. Collier
Imprints Macmillan, Atheneum, Charles Scribner's Sons
OTHER HOLDINGS 50% of Macmillan/
McGraw-Hill School Publishing Co.
1992 Revenue $673 million
Income $62 million
DATA: COMPANY REPORTS, BUSINESS WEEK
Mark Landler in New York