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Zelnick Buys TW Direct marketing Arm—Former BMG Exec Takes Aim Via Time Life Buy
January, 6 2004

Daily Variety, 01.06.04
Meredith Amdur

NEW YORK -- Look out Barry Diller, Strauss Zelnick may soon be nipping at your heels.

The former BMG Entertainment executive on Monday took a major step forward in his plan to create a direct-marketing empire by buying Time Life Inc., the venerable but downtrodden music and video direct marketing wing of Time Warner.

Deal was completed in association with private equity backer Ripplewood Holdings, which also provided most of the equity backing for ZelnickMedia's $60 million purchase of catalog company Lillian Vernon Corp. last July.

Time Life and Lillian Vernon are being merged into Direct Holdings Worldwide, a new entity helmed by Zelnick that will manage the former music exec's burgeoning portfolio of direct marketing-based enterprises and seek out other potential acquisitions.

Precise financial details on the transaction were not disclosed, but Ripplewood and Zelnick are believed to have put down only a minimal amount of cash for the unprofitable Time Life business. Time Warner's primary upside will be through the long-term licensing deal for the Time Life brand that will pay an annual royalty.

Time Warner never officially put Time Life on the block, but the stagnant unit had been undergoing a strategic review for the better part of the year. EBITDA earnings at the Alexandria, Va.-based business dropped more than $54 million for the first three fiscal quarters of 2003 compared to a year earlier. The division generated around $350 million in total sales for 2003. Only 12% of sales were derived from retail outlets and barely 10% from Internet sales. ZelnickMedia is hoping it can significantly expand sales in both channels, especially by expanding its DVD offerings.

The broader mission, Zelnick told Daily Variety, is to build a multi-channel direct marketing operation with an array of products and brands. Businesses will be anchored with a common infrastructure and fulfillment operation while maximizing the sales potential of a number of targeted demographic products that can be sold over the Internet, on television and radio or through traditional direct mailings and catalogs.

'Undermanaged' targets

Like Diller, who assembled his Internet commerce giant InterActiveCorp by acquiring undervalued electronic retail businesses, Zelnick is eyeing similarly less-sexy media businesses. His team of managers targets "undermanaged" and often unprofitable businesses that can be acquired cheaply but with significant upside potential to be mined through cost efficient rollups and management expertise.

"As world markets fragment, direct marketing and media is the wave of the future," said Zelnick, adding that the increased differentiation of products puts more pressure on marketers to know more about who their customers are.

Monday's deal more than doubles the revenues under ZelnickMedia's control overall to just under $1 billion. In addition to the two direct marketing businesses, Zelnick's Gotham-based management and investment firm controls the Savoy and CME (Japan) jazz music labels. Company is also due to close later this week on the purchase of research group OTX from iFilm. Firm also has a minority stake in National Lampoon.

Net gain

Zelnick said his new management team has already made major changes at Lillian Vernon since it acquired the 52-year-old specialty catalog retailer six months ago. In addition to reducing costs, Zelnick has doubled the volume of Internet-based transactions for its household products, gifts and children's merchandise.

While there is some overlap in target audiences between the two retailers, the primary leverage in the merger will be in back-office systems and fulfillment. Zelnick would not disclose how Time Life's 1,400 employees will be integrated with Lillian Vernon's staff of 1,000 or where the employees eventually will be based.

Founded in 1961, Time Life had recently become bogged down in heavy costs and drastically slowing sales. Company halted its once-prominent Time Life continuity books business nearly a decade ago due to the excessive cost. Zelnick said he intends to relaunch the book line, focusing on lower cost volumes. New team also will explore moving into educational software products.

Gamut of genres

Time Life's top-selling titles last year ran the gamut from the "Ultimate '70s box set" and "Worship Together" series to the "Beavis and Butt-head" video collections and the "Body & Soul" series.

Time Inc. chairman and CEO Ann Moore said the sale facilitates her desire "to concentrate on high-growth opportunities in Time Inc.'s core magazine businesses and brands."