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Friday, March 24, 2006

Valuing Penton 

Mea culpa. Mea maxima culpa.

The other day, in reporting on Penton Media Inc.'s 2005 results, I jotted down a few ideas on the valuation of Penton's common stock, of which I own some shares.

I immediately received a few chiding emails from readers of this blog with more stock market skills than I. And I've finally read all the fine print in the annual report--something I should have done prior to:

a) opening my big mouth
b) continuing to hold shares in Penton (mostly purchased before the creation of the preferred shares)

As I said before, I don't have enough invested to matter much, but that's no excuse. In my lazy noodling, I've become the kind of reporter that CJR's Daily Audit routinely calls to the mat.

And because I've come off as something of an inadvertent stock shill for Penton, regardless of my conflict-of-interest disclosures, I will continue to hold my shares, and let the chips fall where they may, at least until the end of this year. That should serve as some form of penance.

Here's a key quote from Penton's annual report:

If the Company had been sold on December 31, 2005, the outstanding loan and security balance of $10.2 million would be required to be paid, the bondholders would have been entitled to receive $315.9 million and the preferred stockholders, including the Series M Preferred, would have been entitled to receive $166.7 million before the common stockholders would have received any amounts for their common shares. In addition, the Series M Preferred holders would receive 8% of all amounts the common stockholder would receive.

Therefore, if you assume the multiples I assumed in my original post (though 11x EBITDA was considered too rich by at least one of my email correspondents), here's how Penton values as of December 31, 2005:

Value at 11x: $449.55 million
Less Debt: $326.1 million
Less Preferred: $166.7 million

Total left for common shareholders: -$43.25 million, or a per share value of about -$1.25.

And because the preferred shareholders' dividends only rise with time, it seems as though it will take one of two scenarios to bring the common shareholders' "real" per-share value to the positive side:

a) An extraordinary increase in EBITDA prior to a sale, or
b) The threat of a shareholder lawsuit in the event of a sale of the company, with the board and Penton executives deciding to take a more palatable return on their investment, and leaving at least something for the common shareholders.

Neither scenario is likely.

(There's a third scenario possible: Penton could be merged with an existing b2b media company, with some provision for common shareholders either at the moment of the merger, or down the road. But again, I'm just noodling and engaging in wishful thinking.)

There's nothing hidden from view in Penton's disclosures throughout the annual report, and the company clearly notes that its board is controlled by the Series C preferred shareholders, and that the company itself is managed by the Series M shareholders, and that each takes precedence over 'common' shareholders like me. There's an obvious, and noted, conflict: the board is supposed to serve as fiduciaries for common shareholders, but as preferred shareholders, their self-interest doesn't favor the common shareholder.

I continue to like Penton as a company, and to root for its management and employees. I don't think there was anything underhanded about the sale of the preferred shares--that event probably saved the company from liquidation. And even the Series M shares make sense, since they're intended to reward executives and employees for their hard work in turning the company around.

I'll report on Penton's operations in the future. But I'll abandon any further attempts at valuation, and try to stay focused on things I know a bit more about.

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