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Reprinted from the September/October 2012 issue of The Financial Manager magazine Ironically, the dinosaur of media, the newspaper, may well be one of the most economical entrees into the new millennium. mergers & ACQUIsItIons T T H H EGOOD, E BAD & THE OPPORTUNITY The tables are turning as investors purchase newspaper properties and reposition their operations for profitability. By JOHN SANDERS N 2009 THE PREEMINENT investor ing to the Newspaper Association of America try that is substantially smaller than it was in Warren Buffet proclaimed that he would (NAA), between 1995 and 2000, newspaper 2000 and about a third the size of what it was not buy a newspaper “at any price.” He industry advertising revenues grew from $36.1 projected to be in 2011. was echoing the sentiments of many billion to $48.7 billion, or at a compound analysts alarmed by the substantial loss annual rate of 6.2%. glass half full Iof classified advertising to sites like Craigslist The expectation of consistent future Despite that contraction, however, there are and AutoTrader, along with declining circu- growth supported strong acquisition prices some trends that have continued to be positive. lation, the explosion of competition from the for newspapers in the 2000 to 2006 time For example, contrary to the common logic, Web and mobile devices and the changing frame. At that time, many publishers believed most newspapers have not really been unprofit- media consumption habits of the younger that newspaper revenue growth would out- able on an operating basis, although they were generation. pace the growth rates for the general econ- unable to pay off large amounts of debt that Flash forward to 2012. Within the past omy. They assumed a 5% average annual was accumulated prior to the recession. year, subsidiaries of Buffet’s Berkshire Hatha- growth rate beginning in 2000. (See chart In fact, on an earnings before interest, tax- way have acquired the Omaha World-Herald; below.) es, depreciation and amortization (EBITDA) The Eagle in Bryan-College Station, TX; the Sadly, just the opposite happened. Accord- basis, average newspaper margins were 19.3% Tribune-Herald in Waco, TX; all of Media ing to data compiled by the NAA, industry in 2007, 17.7% in 2008, 20.0% in 2009, General’s 63 newspapers except the Ta m - advertising revenues ended up declining at an 21.3% in 2011 and 21.5% in 2011. Those pa Tribune, and a minority interest in Lee annual average rate of over 6%. As a con- levels would be the envy of many other indus- Enterprises. And Warren Buffet is not alone. sequence, we find ourselves with an indus- tries. The downturn hit large metropolitan Companies like Halifax Media, 2100 Trust, AIM Media, Versa Capital and Home News Enterprises have been snapping up newspa- pers around the country. Freedom Commu- nications was recently able to successfully divest its entire portfolio of newspapers, rang- ing from the Orange County Register, the 19th largest publication in the country, to smaller publications throughout the United States. Why, one might ask, would such a vocal pessimist become the leading consolidator of newspapers in the country – and why are so many others employing similar strategies? In some cases, the answers are surprising, because they contradict the popular notion that newspapers are not economically viable and, consequently, destined for extinction. There is no denying that the newspaper industry has suffered terribly as a result of the economic and competitive forces. Accord- soUrce: Bond & Pecaro newspapers much harder than local or regional the local edge inactive advertisers that can also prove to be a ones. According to Greene, a key driver in the cur- valuable resource regarding the composition As shown in the table below, the finan- rent environment is the value of local content and spending patterns of local businesses. cial performance of the “pure play” news- to both print and digital endeavors. Larger Similarly, a newspaper acquisition typical- paper companies has indeed continued to companies have historically had difficulty ly includes a base of paid-delivery subscrib- erode. Total revenues for McClatchey, Lee, penetrating smaller markets, adding to the ers. In addition to diversifying the revenue The New York Times, Daily Journal, and impetus to make an acquisition. In some base of the business, this asset can also reveal A. H. Belo fell by 3.9% between early 2011 cases, strategic acquisitions (when publications information about media consumption pat- and 2012, while operating cash flow fell by expand their existing footprints into adjacent terns and the stability of the marketplace. a more moderate 1.9%, reflecting the benefit markets) are being made at multiples in excess In the case of both advertiser and subscrib- of ongoing cost-cutting measures. of 5 times trailing operating cash flow. er assets, a detailed acquisition analysis will However, the enterprise value of those Obviously, buyers recognize that news- evaluate the stability of the revenue stream by companies, as calculated from public-share papers hold assets which, while a shadow of examining customer attrition rates. Adver- prices, fell by almost 20%, suggesting that their former selves, are still able to generate tiser and subscriber relationships that exhibit the market has over-reacted and the possibil- income. Even more importantly, they are an lower rates of attrition are almost invariably ity that attractive entry points may exist. attractive launching platform for advancing more valuable. This decline defines one initial factor that into digital media. Ironically, the dinosaur Newspaper paid circulation has in recent may be driving the re-ignition of the newspa- of media, the newspaper, may well be one years declined at an annual rate of between per merger and acquisition market: newspa- of the most economical entrees into the new 3% and 5%, and the total number of paid pers are just plain cheap. As the table shows, millennium. subscribers is about what it was in the early Comparative Operating Performance and Valuations – 2011 to 2012 (Dollars in Millions) Year Ending March 30, 2011 Year Ending March 30, 2012 Recurring Enterprise EBITDA Recurring Enterprise EBITDA Revenue EBITDA Margin Value Multiple Revenue EBITDA Margin Value Multiple McClatchy $1,343.3 $382.5 28.5% $1,971.0 5.2 $1254.2 $378.1 30.1% $1,623.4 4.3 Lee 771.4 177.5 23.0% 1,123.0 6.3 748.0 172.8 23.1% 973.1 5.6 New York Times 2,372.1 365.6 15.4% 2,244.0 6.1 2,322.1 362.6 15.6% 1,615.8 4.5 Daily Journal 34.5 12.0 34.8% 96.0 8.0 33.1 10.4 31.4% 101.9 9.8 A. H. Belo 483.7 35.4 7.3% 128.0 3.6 454.2 30.6 6.7% 51.1 1.7 $5,005.0 $973.0 19.4% $5,562.0 5.7 $4,811.6 $954.5 19.8% $4,365.3 4.6 Percent Change -3.9% -1.9% -21.5% -19.2% soUrce: Bond & Pecaro the trailing operating cash flow multiples for Paradoxically, the explosion of outlets 1950s. However, many publications, particu- publicly traded newspaper companies aver- spawned by the digital era, while eroding larly in small to medium markets, have bucked age in the 4 to 5 times range. newspaper financial performance, has also this trend and even exhibited some growth. Private transactions currently fall around created an urgent demand for detailed and Another factor supporting the merger and 3 to 5 times trailing operating cash flow, credible content. And the editorial room at a acquisition market for newspapers is the mod- according to Gary Greene, managing direc- newspaper is an attractive starting point, not erate improvement in the financing environ- tor of Cribb Greene & Associates, a nation- just because of the capacity to produce con- ment. While most of the recent transactions wide newspaper broker. This is a far cry from tent, but also because these newsrooms have a have been financed with private equity or sell- the 11 to 12 times trailing operating cash flow legacy of localism that is difficult to replicate. er paper, there has also been some improve- multiples that prevailed earlier in the decade. Many intangible assets identified in news- ment in the availability of senior debt. The combination of lower multiples and paper acquisitions are not just accounting As Frank Grueter, senior vice president of reduced cash flows means that the value of line items but bona fide sources of income the publishing group at Citizens Bank, not- a newspaper business may be only 10% to that can facilitate the growth of a digital ed, despite the well-publicized defaults at the 20% of what it was a decade ago. Howev- enterprise. Typically, a newspaper acquisition homeowner level, the default rates on syndi- er, prices have held up somewhat better in includes relationships with a base of ongoing, cated loans are now the lowest since 2007, small- to medium-sized markets, where cur- income-generating display advertisers. The instilling new confidence among senior rent enterprise values are closer to 20% to existence of these customers smooths the lenders. As a result, debt/EBITDA leverage 40% of their peak. Some newspaper busi- transition to ownership for a buyer. These ratios are edging back up to the 4.0 to 4.5 nesses, particularly in larger markets, have relationships can be converted or cross-pro- times range for non-investment grade (BB/ sold for amounts close to the net book value moted to digital media. BB-) and (B+/B) transactions. That pro- of the fixed assets on their balance sheets.

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