By James Bennett
Former Showtime TV network boss Peter Einstein on his venture with private equity guru Brian Pohl.
Pick another emerging industry we consider standard today?" asks Brian Pohl, private equity guru and partner in the newly formed Einstein Media Capital Partners. I draw a blank. But he's looking for an answer faster than I have time to formulate one in my mind. "Take railroads," he says in a split second, grinning. "These were built in England, everyone was building a railroad and some of them were 3km long. Over time that all consolidated into three to four operators and the same will happen here."
This might not mean much to the majority of punters out there but Pohl and managing partner and former decade-long CEO of TV network Showtime, Peter Einstein, believe they are onto something almost as big, if not bigger than the railroad revolution. And the Canadian/American combo might not be wrong.
It has all the elements of what we’re going to be doing including due diligence, advisory, raising capital,and principal investment.
EMCP specialises and invests in the Technology, Media & Telecom (TMT) sectors, and advises on both private equity investments and M&A transactions. In media alone in the first six months of 2007, 399 M&A transactions were recorded globally with a value of more than US$76bn, up by 25% on the entire year for 2006.
And to top it all, Einstein, who started Showtime with 16 people in a warehouse in Jebel Ali in Dubai, believes EMCP is currently the only company of its kind in the region looking to invest in those three sectors.
"My time out here in the last 10 years has seen the sector really grow. I felt the time was right to get involved with lots of different businesses whether on an advising basis, raising capital, and so on," says the entrepreneurial Einstein.
"So I looked further into who was in this space and found that there's really no one focusing specifically on TMT transactions. Internationally there's plenty and in my time I've spoken to many of the large private equity houses outside, many friends during my Showtime days, but they're all looking outside in, they all want to do the big deal, some form of consolidation, or a large M&A transaction. They're only interested in doing deals in the region of a minimum of half a billion dollars," he adds.
Einstein however, says that the big deals are not yet ready to be made in the Gulf or the wider Middle East.
The market, he says, is still too immature. Nevertheless, there is still a vast amount of revenue to be raked in, advice to be handed out and capital to be tapped into with a vast pool of High Net Worth Individuals (HNWIs) eager to invest their petrodollars into media, technology and telecom deals, particularly those sourced and thoroughly examined by two men with over 50 years experience between them.
"Our view of those who only want to do large deals is ‘you're going to sit there and wait a long time' because a) those are rare in any event and b) in this region to get the big guys to merge or do some major transaction takes a lot of effort, and there's a lot of different personalities involved. That will take a long time to happen, if ever," he laughs.
If anyone's got the contacts in medialand it's Einstein. He has 25 years experience with some of the most recognisable brands in the world, starting as a key member of the original team behind the launch of MTV in the early eighties - both in the US and Europe. More than half of his career has been spent at CEO or president level, most recently with Showtime Arabia.
And it seems to have paid off. With a waterside villa for himself and his family on the recently opened Palm Jumeirah, working in media can have its benefits, however, he and his partner Pohl believe that much more can be achieved.
"There are lots of opportunities to do lots of deals between say US$1m and US$100m with companies who want to sell, merge, recapitalise to build a better business or even start-ups," explains Einstein.
"There are lots of people who want to come into the region and start their businesses or open operations for their businesses here but where do they go for capital or advice if they've had no experience out here?
"This is the birth of EMCP, me coming from the media operations business, former CEO of Showtime and Brian with a vast amount of private equity experience."
Ironically, EMCP's first deal is with a start-up company called Ginx and ranges between US$1m and US$10m with Einstein refusing to reveal the exact value. Based in London, where EMCP is registered, Ginx is a one-of-a-kind company, says the two men almost simultaneously.
"It's a smallish deal, but it has all the elements of what we're going to be doing including due diligence, advisory, raising capital, and principal investment. One of the key benefits of EMCP is that once the deal is done, most companies move onto the next deal, but we stay in there and get as involved as possible," says Einstein.
The company was eventually liquidated but even worse, as soon as I was approaching the building, the guy whose company it was pulled away in a brand new Ferrari. I’ll never forget watching that Ferrari drive down the street.
Pohl is confident Ginx has been a great first acquisition, filled with potential and not just on a local and regional level. "Ginx is a new TV channel but with a twist. Think back to the early days of MTV, all the content was created by a band wanting to create a music video and MTV provided that. Ginx is doing something similar but with games.
"Today, gaming shows have people sitting there talking about reviews and what hardware platform it can accessed on, and it's not very interesting. But game content today and the power of the graphics and computers is one step removed from what Disney did with the film ‘Cars'. Ginx takes that and creates content out of it. You film a complete game being played from end-to-end and then pull out the interesting bits, creating an entire show about a game."
The beauty of the idea, however, is that it has the potential to work online where viewers are directed to the Ginx website to play the games they have just watched being reviewed on television, as well as being franchised out all around the world.
"We're in the process of closing franchise deals with different companies," says Einstein. "The business model is excellent in the sense that it's a franchise scenario where the revenue will come from minimum guarantees and splits of gross revenue. For that Ginx provides all the programming customised or uncustomised and designs a website for that specific territory as well. We will immediately start rolling Ginx out as both a local and international brand.
"Conceptually, it's the first time I'm aware that a TV channel acts as a marketing tool for a website as opposed to a website acting as a reverse," he adds.
Ginx may sound like a unique proposition and a sound business concept, but as so many private equity players know to their cost, you just never know. And Pohl knows exactly what that means. His own worst deal was with a company that he and his investors put US$1.23m into, partnering with one of the big UK banks.
What he wasn't to know was that a year later the bank phoned him to break the bad news that the company in which he had invested had gone bust and the board director had immediately resigned on the spot.
"We said ‘what about all these questions?' and the bank didn't have good answers. It turned out that the company directors had defrauded the company by taking money out to friendly companies they owned and overpaid for services," says Pohl looking back.
"The asset, the software, we thought we owned we didn't. The company was eventually liquidated but even worse, as soon as I was approaching the building, the guy whose company it was pulled away in a brand new Ferrari. I'll never forget watching that Ferrari drive down the street."
Pohl then consulted his lawyers but even they couldn't help. "They said ‘you could take them to court but we'll charge you a million pounds in fees, but they've done it before, there's a couple of clauses in here which they're going to use to ride scot-free out of this deal'.
"I learnt that just because I have someone as a co-investor it doesn't mean I can abdicate oversight to them, I still need to be actively involved in the company as well as the numbers. Even if we don't take a board seat we always receive all board communications, have the right to attend any board meeting anytime without notice." Around 50% of deals don't come off, collapse or are "pinched" as Pohl puts it, at the 11th hour and 59th minute, but when they do succeed they can pay off and pay out in a very big way. "The best was a company I put US$1.63m into. Then, through a series of events the company lost its biggest customer that made it look like it was going to be the worst deal." Pohl, however immediately spotted an opportunity and turned things around.
"We then bought the company that won the big customer, but needed to bolster the product line so we bought a third company, the management team wasn't strong so we bought a fourth company, a lot of the employees didn't like the management team so they left so we had to buy a fifth company for more employees.
"Over 18 months it looked like the worst deal ever. But during that process we paid out dividends of US$10.2m to ourselves, listed it and owned 20% of it at list and went public at a price of US$244m so I had several times my capital back before it listed and US$49m of paper that I could trade on the London Stock Exchange. It's about active investing, figuring out what the problem is and sorting through it."
Deep in the throes of talking to senior business figures and Middle Eastern HNWIs, Pohl and Einstein are looking to tie up another two to three deals by the middle of next year, one in telecoms expanding a major broadband service in the region. Einstein is optimistic but adds, "Right now I'm saying it's great, but who knows?"
The sector has plenty of potential but equally plenty of risk and both men realise what they have let themselves in for. Definitely a business partnership worth keeping a close eye on.
Peter Einstein will be speaking at the Arabian Business Media and Marketing Conference in Dubai on November 11-12. For details log on to www.arabianbusiness.com.