Audible
Case Study
| Name | Audible |
|---|---|
| Sector | Tech & Telecom |
As the Internet’s leading provider of spoken word information and entertainment, Audible.com distributes more than 70,000 hours of programming – audiobooks, audio editions of newspapers and periodicals, radio programs and original programming. AudibleReady® platform technology enables automated digital downloads of content to MP3 players/devices including Apple iPods, Palm, Sony and HP PDAs, a growing array of Smart wireless phones and other devices.
Apax Partners originally backed Audible in 1995, when it was a fledgling startup. Apax Partners sold its shares shortly after the 1999 IPO. At the time, the market for Audible services was not really ready, and the company struggled for the next several years. Despite its financial woes, the founder and CEO, Don Katz, and the core management team, remained with Audible, convinced that the product offering was valuable to consumers, albeit ahead of the market at the time.
In 2003, as part of Apax’s ongoing investment focus in Digital Media, we re-engaged in discussions with Audible. At the time, the company had been de-listed from the NASDAQ exchange due to a capitalization structure that had over-burdened the balance sheet. However, our market understanding enabled us to identify the emerging market for MP3 players and the increasing comfort of consumers to pay for on-line content, and to realize that Audible’s business was fundamentally sound and poised to ride on the coattails of these growth trends.
In August 2003, Apax Partners led a PIPE investment in the Company, which included a primary capital infusion into Audible and buyout of a secondary position of redeemable stock from Microsoft. Our strategy was threefold:
1. Building a Better Capital Structure
With the PIPE investment Apax Partners joined Audible’s board. We quickly recognized how critical to success a clean–up in the capital structure was. We led the recap in 2 steps. Firstly, as part of the original transaction, Apax Partners changed the terms of the shares we purchased from Microsoft to make them more company friendly and then, in Feb 2004, Apax Partners gave up all our preferred rights by converting to common shares, and convinced all the other preferred shareholders to do the same.
Apax Partners recognized the benefits in canvassing all of the investors to move from converted preferred shares to common stock. Our vision in driving this conversion to a more simple structure was to begin positioning Audible for a comeback as a public company. In July 2004, Audible relisted on the NASDAQ Small Cap Market exchange.
So many investors are focused on protecting the downside; that Apax Partners gave up downside protection to help the company position for its public offering in November 2004 is unique.
2. Apax Partners worked closely with Audible in the development of key partnerships and alliances.
Apax Partners’ 2003 investment resulted in Audible making significant inroads in developing partnerships with device vendors to adopt the AudibleReady platform technology. Audible technology is now incorporated into more than 80% of the current US MP3 player and PDA market.
Apax Partners facilitated a number of introductions to device manufacturers and carriers for the provision of spoken word content on wireless devices. This gives Audible an important foothold in the coming era of “Smart” wireless telephones that contain the ability to store media of all types and access that media via wireless networks. Through Apax Partners’ introductions, Audible also secured the mobile operating system as a platform partner.
3. Apax Partners worked with Audible in the development and execution of their recent strategic plan
Apax Partners encouraged Audible to expand into Europe, played an important role in the development of that strategy, and helped facilitate relevant introductions in Europe. The company has recently established an office in Germany (www.audible.de) and has earmarked other European countries for expansion.
Apax Partners also encouraged Audible to develop a wireless strategy and were instrumental in helping the company develop the value proposition of Audible in this area, and facilitated relevant introductions (see above). We believe wireless represents a potential growth engine for Audible in the next few years.
Central to Audible’s success is the distribution of content. Apax Partners worked with Audible to improve their direct marketing efforts with the help of Apax Partners’ Consumer Retail Group who have extensive experience in this area. Apax Partners also facilitated introductions to our Media Group both here in the US and Europe, and provided on–the– ground support to Audible’s expansion into Europe.
Secondary Offering/ Re-IPO
In November 2004, the company completed a successful $125 million secondary offering, with company proceeds of $45 million. The offering provided Audible with the necessary capital to execute its European expansion and wireless growth strategies. Apax sold 2.8m shares for $65m at 17X of the cost, and we continue to hold the majority of our stake in the company.
This company has been operating on a cash flow positive basis since the last quarter of 2003 and has managed to accelerate growth over the past few quarters.
“Everyone at Audible considers our partners at Apax to be an important part of the Audible story – both as investors and as important contributors and members of our board,” said Don Katz, Audible’s chairman & CEO. “Alan Patricof and Oren Zeev are consistently looking for our best interests in ways that transcend the norm for financial investors.”
“We believe successes like Audible are no accident – rather, they are the product of our strategy of focusing on core investment areas and relationship building. We feel privileged to have backed a superb visionary entrepreneur like Don Katz for the second time,” said Oren Zeev, Partner, Apax Partners.
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