Barbarians at the Gate -Let’s welcome them!

KKR announced the purchase of RBmedia. This is the parent company of Audiobooks.com. In the announcement, KKR estimated that in 2018 consumers will spend 900 million dollars in 2018. This number is up 20% from the prior year.
KKR was brought to public attention decades ago in the book “Barbarians at the Gate” where some had their first glimpse at how private equity firms made money. It was the story of the RJ Reynolds and Nabisco Foods deal; at the time the largest leveraged buyout. While leveraged buyouts and private equity are dirty words to some, let me give you my opinion of what this bodes well for the indie publisher now that PE firms are sniffing around audiobooks.
First a little private equity 101. PE (Private Equity) firms make money by investing in companies; private ones. They invest in private because the market is much bigger than public companies (the stock market) and they don’t have the reporting issues. There is also a bigger reason; the returns. A company like KKR has money from the ultra-wealthy and huge pension funds. These investors give that money to PE firms because they consistently deliver better returns than the stock market.
Now the way a PE fund works is they raise a fixed amount of money then they deploy it in companies that meet specific investment criteria. The criteria can be as simple as size, but it usually is more sophisticated and considers the market and business trends. The investments are short; five to ten years from money going into the fund then coming out. PE firms always exit an investment by selling to someone else or taking the company public. They are in the business of investment not the management of businesses. The best firms attract more and more capital KKR is one of the best; certainly one of the biggest.
This transaction is interesting not just because it is in the publishing space but by who the players are in the deal. RBmedia was sold to KKR by Shamrock Capital. Shamrock is a big investor with 1.9 billion in assets. This was originally Roy E. Disney’s family office for investments. They sold to one of the biggest PE firms (so big they are public) with billions of equity.
The press release from KKR had this to say;
“The proliferation of mobile devices and voice-enabled ecosystems has created an always-on consumer who increasingly seeks new content to enjoy,” said Richard Sarnoff, Chairman of Media, Entertainment, and Education for KKR. “This trend has made audiobooks the most growthful segment of the publishing industry. RBmedia is very well positioned to capitalize on these dynamics with the industry’s largest independent catalogue of premier audio content that can be flexibly delivered across platforms, worldwide.”
When a PE company buys, it’s because they have expectations that there is significant growth in the future. Furthermore, this isn’t a small deal. KKR only does big deals, so this isn’t a grow to scale play, or is it?
Why do I think this deal announcement is significant?
1. If the largest PE firm is doing deals in this space that means the smaller ones are looking at it too. That means a portion of the 750 billion of capital on the sidelines will be coming into this space. There will be more deals in the future.
2. These investors will accelerate growth and change, as they have an average five-year timeline for investment to return. Capital is always an accelerant (good or bad), so expect the audiobook market to mature fast.
3. The scale of this deal is something that could become a threat to audible.com (on the other hand, one exit for KKR could be to sell to Amazon). KKR needs to see growth these guys are rarely buy and hold, so they had a growth plan in mind before they bought the company.
4. RBmedia and all the other audiobook players all need content. The more investment in this space, the more demand there will be for content. This is good for content producers. More buyers mean higher profits.
I have spoken and written before about how the content market landscape will change and the opportunities for content producers to create wealth. This deal shows to me that Wall Street money also sees the growth and is looking to take part and capture some of that wealth for their investors. As more investment pours into this space figure out how you can be a seller and not a buyer.