Monday, March 29, 2010

How to calculate what your paper is worth

Sliding sales, plunging profitability, contracting credit markets and faltering faith in the publishing business dropped the value of the Daytona News-Journal by 93% in four years.

Key operating data from the Florida daily obtained from knowledgeable sources provide a rare case study of the forces that have converged to humble the once-mighty newspaper industry.

The metrics resulting from this analysis also make it possible for you to guesstimate the value of your local paper, as discussed below. First, some background:

While the News-Journal was valued at $300 million in an independent appraisal in 2006, a federal judge ruled last week that the paper was worth a mere $20 million. Thus, its value fell 93% in four short years.

The judge’s ruling is likely to end a feud that erupted in 2004 between the heirs of founder Julius Davidson, which own a majority of the paper, and Cox Enterprises, which owns the rest. Six years after hostilities broke out, the paper is slated to be sold by the end of the month to a newly formed group of investors.

The case provides a rare apples-to-apples comparison of how a newspaper would be valued between 2006 and today. The year 2006 is significant, because it was the first of the four years in which newspaper revenues began their steadily accelerating decline.

Detailed information about the newspaper's operations between 2006 and now show that revenue fell 38% to $60 million and EBITDA fell by 35% to $6.7 million. EBITDA, which is the most common way to measure operating profits, stands for earnings before interest, taxes, depreciation and amortization.

The plunge in the paper’s value resulted not only from a severe downturn in its business but also from the contraction of the global credit markets and a loss of confidence in the future of newspapers. Consequently, the paper was deemed to be worth only 3 times its operating profits in 2010, as opposed to 29x its profits in 2006.

Businesses are valued at multiples of their operating profits, because bankers use the metric to decide how much to lend to a buyer who usually puts up a portion of the purchase price in cash and borrows the rest. It’s a lot like taking out a mortgage on a house.

When credit was freely available in 2006 and the growth prospects for newspapers were widely thought to be bright, banks were willing to give money to newspaper buyers at double-digit multiples of a publication's operating profits. This resulted from the belief that revenues and profits would grow sufficiently in the future to cover the interest and principal payments associated with the jumbo loans.

The valuation of 29x EBITDA was aggressive even in 2006, but it was premised on the idea tht a new owner could cut substantial expenses out of the family-run operation to bring operating margins into the neighborhood of 25%. In that case, the multiple would have been a more reasonable 12x EBITDA.

Now, take a look at the realities of the newspaper business today.

With the industry seemingly in secular decline – and credit considerably tighter than it was four years ago – bankers barely are willing to lend 2x operating profits. Cash from a buyer, which is known as equity, would make up the difference between the loan and the total cost of an acquisition.

Thus, the value of the Daytona Beach paper was trimmed not only by the decline in its business but also by a sea change in the credit markets and declining confidence in the future of newspapers.

The data derived from this exercise makes it possible to estimate the value of your local newspaper according to its circulation, its revenues and its EBITDA. Here’s how each works:

:: Circulation. As you can see from the column titled “Multiple” on the “Now” table, the Daytona Beach paper is valued today at $294 per daily subscriber and $227 per Sunday subscriber. If you look up the circulation of your paper here, you can multiply the number of subs by these metrics to come to a rough valuation. The current value of daily Daytona Beach subs is 89% below the $2,778 they were worth in 2006. (A list is here of the circulation of the 100 largest newspapers in 2006.)

:: Revenue. As you can see from the column titled “Multiple” on the “Now” table, the Daytona Beach paper today is valued at 0.33 times its revenue of $60 million. If you know your paper’s revenue, multiply it by 0.33 to calculate its approximate value.

:: EBITDA. As you can see from the column titled “Multiple” on the “Now” table, the News-Journal today is valued at 3x its EBITDA. If you know your paper’s EBITDA, multiply it by 3 to calculate its approximate value.

If you average the outcomes of all three of the above methods, you can arrive at a pretty fair approximation of what your paper is worth. If you have access to data from 2006, you can run a comparison between then and now. But it won’t be pretty.


Anonymous Anonymous said...

Very interesting and points to some fibbing going on in the newspaper industry. Look at the extravagamt valuations publishers are putting on newspapers not in trouble or bankruptcy. Looks like the Securities and Exchange Commission has been napping again, or they would force write-downs.

6:32 AM  
Anonymous Anonymous said...

"...Look at the extravagamt valuations publishers are putting on newspapers not in trouble or bankruptcy..."

Please elaborate. I'd like to know specifically what companies you are talking about.

9:08 AM  
Anonymous Anonymous said...

Newspapers were never selling for 29x ebitda, despite what a judge wrote. Even in the heyday 20 years ago, read any analysts report and you might see multiples of 10-to-15 times ebitda, depending on the demographics served. 3 times EBITDA is also silly. That's a 33% pre-tax return on your investment. Only something heading towards bankruptcy (even without debt burdens) in three or four years would be worth that little. Do you really think that's the state of the average newspaper?

11:43 AM  
Blogger Martin Langeveld said...

You can get other estimates of the valuation multiples by looking at the public firms that are essentially pure newspaper plays, including AH Belo and McClatchy.

If I did my arithmetic correctly, McClatchy is trading for just 1.2 times trailing (2009) cash flow. (It has a market cap of $416M, vs. cash flow of $341M. It's even worse if you look at expected cash flow — assuming they achieve in 2010 cash flow = 4x fourth quarter cash flow, they are trading at only 0.6x, probably because so much of the cash is eaten by debt payments.

Relatively debt free AH Belo, on the other hand, trades for 4.5x 2009 cash flow (market cap of $147M vs cash flow of $32.7M). But they are at just 1.9x 2010 cash flow (if 2010=4x Q4).

Basically this seems to say that the market does not expect them to maintain the Q4 performance through 2010.

12:50 PM  
Anonymous Anonymous said...

having bought and sold many newspapers over the years, small daily newspapers in rural areas of the plains states grossing $1 million or less are worth maybe $250,000 at most. You can buy a decent building for $25,000; printing press for $50,000; add subscription lists, advertiser lists, debt service, value of the business grossing $1 million adds up to maybe $250,000. Anyone who spends mega bucks buying a newspaper today without a lot of equity in the business is going to default on loans.

1:14 PM  
Anonymous Anonymous said...

Martin, the multiples determine enterprise value, not market cap, which is enterprise value minus outstanding debt.

2:22 PM  
Anonymous Anonymous said...

At many newspapers, thousands on the average are made up of "bonus days" and other scams that count phantom copies. Might need a fugde factor to account for the nonsense circ.

If the banks that are taking haircuts or exchanging debt for equity only knew how to examine a circ file (instead of relying on the impotent ABC, they'd be running for the hills.

3:00 PM  
Anonymous Anonymous said...

Don't forget to multiply everything by Zero...... ;-)

6:17 PM  
Anonymous Anonymous said...

"Don't forget to multiply everything by Zero...... ;-)"

Why even waste your time (or mine) with such a comment. Say something that matters or ask a question.

"At many newspapers, thousands on the average are made up of "bonus days" and other scams that count phantom copies."

You need to take a look at the way changes in reporting have made "bonus days" and its "cousins" irrelevant. You also need to take a look at the overall trends in these type circulation categories.

Newspapers have been quickly reducing these numbers because advertisers aren't buying it anymore. It does account for some of the circ declines you're seeing.

Boy, how I miss the five newspapers outside my door every morning at the Holiday Inn. Nothing to trip over as I leave...

10:12 PM  
Anonymous Anonymous said...

Interesting but Daytona’s sale is so unique with all the infighting and court cases that it should never be considered a comparable.

8:25 AM  
Blogger Robert H. Heath said...

Reply to Anonymous

"... 3 times EBITDA is also silly. That's a 33% pre-tax return on your investment."

Actually 3 times EBITDA is quite sensible for a business with shrinking free cash flow (FCF).

Let's assume for simplicity's sake:

:: all-equity financed company (hence equity value = enterprise value)

:: 10% discount rate,

:: 60% EBITDA-to-FCF conversion rate, about what McClatchy did in 2009.

:: 10% annual decline in EBITDA

According to the growing perpetuity model (also known as the Gordon Growth model), the present value of growing (or shrinking) series of cash flows is:

PV = FCF / (r - g)

where FCF is next year's free cash flow, "r" is the discount rate, and "g" is the growth rate, which can be negative.

Assuming FCF = 0.6 x EBITDA and plugging the numbers yields:

PV = (0.6 x EBITDA) / (.10 - .10)


PV = 3.0 x EBITDA

This may be generous for it assumes that newspaper companies can shrink expenses as quickly as revenues decline. There is -- obviously -- a limit to that assumption.

10:11 AM  
Anonymous Anonymous said...

10:12 pm -

You are correct, advertisers don't want bonus days. That's why ABC lets papers lie about them. Papers use the max allowable per PS and don't have to break them out, and they get counted as paid. The more recent shell game is to subtley change a frequency from say, Sunday Only, to Sunday "Extra" where unwitting customers have daily papers added to their service, almost but not quite replicating a greater frequency. Carriers don't deliver, customers don't complain, ADS ARE NEVER SEEN, but the circ is counted as paid.

How do you think a paper with just over 60K truly paid 7-day subs can claim almost a 100K daily average?

It's legal by the rules, but if I was an advertiser, a lender, a broker or a potential buyer, I'd be pissed. And there is so much more, all the old tried and true adjusted for rule changes of course.

But when even high finance's finest miss this stuff when evaluating deals, (see McClatchy, Tribune, JRC), what is a local advertiser to do?

1:29 PM  
Anonymous Anonymous said...

I would love to hear responses to this E&P story. Especially from Mutter.

8:28 AM  
Anonymous Anonymous said...

Pretty crazy that I just received my Cribb newsletter debunking this article. It said that valuations and sales are averaging 6-7x EBITA.
Not so.
Try in the 3-5x range, with 4 being reasonable if you're buying the lifestyle or geographic location.
Too many small-market newspaper owners are being duped by brokers to test the waters at high multiples, only to end up wasting everyone's time.
With circulation losses, difficulty in stripping finances to the real discretionary net, and broker over-valuations, it's no wonder nothing is selling.

3:18 PM  
Blogger Will McLean said...

Note that Cribb said that most of the sales included some element of seller financing, and that four money losing papers weren't included in the multiple averages.

11:42 AM  

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