A curiously strong IPO
A collection of 75 small dailies and 348 non-daily products scattered across 18 states from Massachusetts to California, Gatehouse had an explosive initial public offering last week, gaining 22% in trading at the New York Stock Exchange to close Friday at $22 per share.
In the process, Gatehouse emerged as, by far, the most valuable newspaper company in the land. As illustrated in the table below based on statistics from Yahoo Finance, the $1.23 billion enterprise value of Gatehouse, which is 24.9 times its operating cash flow over the last 12 months, is more than twice the average value of the publicly traded newspaper companies.
Enterprise value is calculated by adding together a company’s market capitalization and debt, plus or minus a few technical adjustments. Operating cash flow, commonly known as EBITDA, measures a company’s earnings before the costs of interest, taxes, depreciation and amortization.
The ratio between enterprise value and EBITDA is a key metric in valuing newspaper companies when they are bought and sold. You can gauge the sentiment of financial types toward the industry by comparing the ratios paid in recent deals. Higher multiples reflect the expectation of vigorous sales and profit growth; lower multiples suggest the opposite.
When Lee Enterprises acquired Pulitzer as recently as mid-1995, the company paid 13.5x Pulitzer’s EBITDA. By the time McClatchy bought Knight Ridder this summer, the transaction was valued at 9.5x EBITDA. Even though Tribune Co. now is potentially in play, which usually lifts the value of a company’s stock, its shares are trading at 7.6x EBITDA, the second lowest among all the publicly held publishers. (The value of the Tribune's neighbor in Chicago, the Sun-Times Media Group, is in negative territory owing to the hijinx of previous management, so not included in this analysis.)
Notwithstanding the negative trend in industry multiples, it must be pointed out that certain recent strategic newspaper transactions have taken place at double-digit multiples. MediaNews paid 11.5x EBITDA to buy two prominent Knight Ridder dailies that nearly tripled the size of its cluster in Northern California. And Community Newspaper Holdings announced last week that it is paying 11.3x EBITDA for a group of papers being divested by Dow Jones. Still, these double-digit deals were valued at rates considerably lower than Gatehouse.
The limitation of valuing a company based on trailing earnings is that the formula doesn't take into account acquisitons or mergers that fundamentally change the business going forward. This is the case with Gatehouse, which in June bought two newspaper groups covering 1 million suburban households in the Boston area. On a pro forma basis, the Boston transaction added an estimated $184 million in sales to the $205 million in revenues generated by the company in 2005.
If you assumed that Gatehouse had owned the Boston properties for the last 12 months and operated them at the same level of profitability as the rest of its holdings, then the pro forma trailing EBITDA for the company would have been something like $86.3 million, according to information gleaned from the prospectus Gatehouse filed with the Securities and Exchange Commission.
From this perspective, it is fair to view the company’s value at 14.2x EBITDA, not 24.9x.
Even after taking this adjustment into account, however, Gatehouse – with an adjusted enterprise value 46% greater than the industry average – remains the most expensive newspaper stock of them all.
Will this Wall Street honeymoon have legs?