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.