Before the explosive growth of the new fangled Internet machine, apartment and house hunters relied on the classified ads in the local newspaper or the slick-paper, free real estate guides that were strategically placed outside of grocery store entrances and in other high-traffic retail areas. Well, free to the end-user, that is. Not so much for the advertiser who paid dearly and religiously for that placement.

Nestled in suburban Atlanta (if there was ever a Ground Zero for residential real estate, both multi-family and single family), Primedia (NYSE: PRM), formerly known as K-III Communications Corp., has practically owned the national apartment and new home guide media space for two decades. Across its printed brands such as Apartment Guide and New Home Guide, Primedia publishes and distributes nearly 15 million directories to more than 17,000 client locations and more than 28,000 retail locations. Somewhere, a forest is shrieking.

In addition, Primedia also owns Distributech, the nation’s largest distributor of free publications, with more than 51,000 outlets in 41 states. But the story gets even better…

Don’t think that Primedia hasn’t seen the writing on the wall about print publishing. Like any intelligent media company, Primedia has successfully leveraged its expertise and print brands in the digital realm. How successful have they been? Try almost 300%! That’s the increase in user base Primedia has seen from its online products compared with its print offerings.

The 15 million-plus print directories Primedia puts out looks pitiful when compared to the 50 million-plus annual unique users of its digital products. As of the third quarter of 2010, 75% of the company’s content and reach had shifted to its digital portfolio. From now on, it’s all about the eyeballs — and Primedia gets ’em — and advertisers still pay. And thanks to the housing bust, renting is, and will be for a while, a more viable option for many consumers.

Get there before the private equity guys
But for all of Primedia’s highlights for investors, there are some lowlights. The numbers have not been trending well. The third-quarter 2010 report for the three months ended September 2010 looks a little, actually a lot, like my third-quarter grades my sophomore year of college: A “D,” an “F,” but luckily two “As” that averaged a low “Gentleman’s C” (my father had a different description, which probably shouldn’t be published for polite readers). Total revenue was down 7.3% for the third quarter over the same period in 2009 and revenue for the flagship, apartment-targeted products was down 5.6% for the same time period. Still, the company made $0.16 a share and declared a common dividend of $0.07. The yield is currently right at 6.5%. EBITDA margins grew to 29.3% from 27% in Q3 2009. Primedia also grew its core apartment business’ reach by 4.8%.

Primedia also reduced operating expenses by 10% and paid down $6.9 million in long-term debt. Sounds good. However, long-term debt is Primedia’s biggest hurdle, to the tune of more than $200 million outstanding. That could be more than a hurdle. It could be the often-mentioned brick wall that businesses run into. But if revenue is eroding and debt remains stubbornly high, why have insiders been buying the stock fairly aggressively for the past six months?

In January, Primedia announced it had hired a boutique investment bank as a financial advisor to explore “strategic alternatives.” That’s Wall Street lingo for generally three things: purchase, sale or bankruptcy. Yes. The company has a lot of debt and business has deteriorated. But it’s adapted to the changing environment and is still the leader in its space. So, it’s still a viable business. Management still believes in it.

It’s probably not bankruptcy, unless there’s something there we can’t see.

Acquisition? Nope. Too much debt. That leaves one last possibility.

Who would buy Primedia? A bigger, publicly-traded, more digitally-focused media company that wants the ad revenue? Maybe. But my Spidey-sense tells me otherwise.

Historically, private equity (PE) loves media deals. Many of the better PE firms have experience with these types of acquisitions. And at a market cap of about $200 million, that would put Primedia right in the crosshairs. It makes sense to me.

Action to Take –> PRM shares currently trade at about $4.30, with a price-to-earnings (P/E) ratio of 8.1 and a 6.5% yield. The last time the stock was at these levels, it ran up 23% on no apparent catalyst other than some insider buying. On Nov. 17 of last year, an insider purchased 438 shares. Not that big of a deal when you’re talking about a four-dollar stock. However, on Dec. 31, two insiders bought a total of 31,811 shares. I would call that significant. Take a look at what the stock did after those two purchases…

Fourth-quarter 2010 and full-year earnings report comes out March 3. Things might get bumpy based on the results, but the real prize is a potential takeout. A $5.20 target (20% premium) wouldn’t be unreasonable. And if history is any guide, we’re at least likely to see some renewed insider activity at these levels, which could cause the stock to pop as well.

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