The Deal, 6.16.09
ZelnickMedia Corp. breathed life into the private equity sector Tuesday by announcing a three-way investment in a Midwestern direct response television media company.
The New York investment firm's new portfolio company, Cannella Response Television Inc., is a dominant player in placing and distributing infomercials and other commercial messages that qualify as long form direct response television. Short form consists of commercials that also qualify as direct response television, or DRTV, but are two minutes or less in duration.
Although terms weren't disclosed, the investment was sufficient for ZelnickMedia to reach beyond ZM Capital, the private equity fund it assembled in 2008.
Palladium Equity Partners LLC, another New York private equity firm, matched ZelnickMedia's equity stake, while New York merchant bank Veronis Suhler Stevenson provided mezzanine financing and took a slice of equity.
Cannella marks the first investment for ZelnickMedia's ZM Capital fund and Veronis' VSS Structured Capital II
Burlington, Wis.-based Cannella received advice from a team led by Sanjay Chadda at New York investment bank Petsky Prunier LLC on assembling a deal whose sole debt component is the mezzanine financing Veronis put up.
"ZelnickMedia has always had a fairly conservative approach to leverage," said Scott Siegler, who with fellow partner Andrew Vogel served as the PE firm's point men on the deal. "It was good to be in the habit of not using too much of it when it was no longer available."
The Cannella investment is a logical extension for ZelnickMedia, which cut its teeth in long form DRTV through its financial sponsorship of Time Life Inc., the global music and video direct marketer Time Inc. once owned.
ZelnickMedia exited Time Life in 2007 as part of Ripplewood Holdings LLC's take-private acquisition of Reader's Digest Association Inc., which now owns all of it.
"We then focused our attention on alternative advertising models as we watched the 30-second spot deteriorate in appeal," Siegler said. "We've been trying to figure out where all those advertising dollars will go."
The Internet is an obvious place for advertisers, but it's not without drawbacks. First, its ability to accommodate a limitless supply of commercials has online costs per millions, or CPMs, in a perpetual state of decline. Second, its fragmented nature makes it difficult for consumers to locate commercial messages that may interest them.
With DRTV, however, marketers benefit from the same return-on-investment calculations that make the Internet so attractive. Yet they also benefit from what Vogel called "the breadth and width of television."
Another feature of both Cannella and the DRTV industry in which it competes is a built-in counterbalancing act. When discretionary income declines, the ZelnickMedia partners explained, DRTV sales drift down, too. But so do the cost of media purchased by companies such as Cannella, which helps keep costs in line with revenue.
DRTV also responds to economic changes by tinkering with its product mix. When times were good, as they were when ZelnickMedia started studying the business, many direct-response messages were aimed at relatively high-end endeavors such as real estate investments, house makeovers and kitchen rehabs.
"But now it's all about foreclosing, free telephoning, heating the house better and other value-oriented propositions," Siegler said. "We're very impressed by how quickly the industry adapts."
ZelnickMedia and Cannella's other new partners not only back their target's management — a team led by founder and executive director Frank Cannella and CEO Robert Medved — but are committed to additional growth through building and buying.
Short form DRTV is an immediate target for expansion, considering both its relationship to long form and its accounting for more than half of the $100 billion DRTV industry.
In May, ZelnickMedia dropped its pursuit of the Austin American-Statesman newspaper in Texas, according to a news report.