Will newspaper values recover?
After buying his first stock when McClatchy went public at $18.98 a share in 1989, Walters kept accumulating shares as they soared past $74 in 2005 and watched in horror four years later when they plummeted to less than 50 cents apiece. Undaunted, Walters scooped up a bunch of shares at the bargain price and sold them at a profit when the stock hit $4 and $5 earlier this year before settling to around $3.50.
Walters won't rule out making similar opportunistic trades again. But he is no longer making long-term investments in his company because he is worried about the future.
"I haven't bought any shares for a couple of years, because the price was too high in relation to what it is likely to be," said Walters, who is 67, single, and sufficiently well off to collect boats as a hobby. "The appetite for information and analysis is as strong as ever, and newspapers are flailing around to try to make it. McClatchy has as good a chance as anyone, so I hope the stock goes up. But if I were young and had a family, I would be thinking about getting into another line of work."
Walters' analysis mirrors the general skepticism among sophisticated investors about the prospects for the newspaper business. Like Walters, the pros think the value of publishing companies has a scant chance of advancing from its current, historically anemic levels. In a moment, I will tell you why. First, the background:
Although the shares of publicly traded newspaper companies have recovered from the all-time lows they hit in the trough of the Great Recession, few independent analysts foresee the day a newspaper will be worth six, eight, or 10 times its operating profit, much less the bodacious 20, 30, and 40 times earnings that some publishers paid for trophy acquisitions in the era when McClatchy's stock peaked at 20 times what it is worth today.
As of the end of the first quarter of this year, the enterprise value (market capitalization plus debt) of the publicly traded newspaper companies averaged 5.5 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) in the prior 12 months. The enterprise values ranged from 2.5x EBITDA for A.H. Belo to 5.2x for McClatchy to 13.4x for GateHouse Media (whose value was inflated by its $1.3 billion in debt, not the sub-$10 million value of its stock).
To be sure, newspaper values generally are stronger today than they were in 2009, when a private equity firm picked up the otherwise-unwanted San Diego Union-Tribune for an undisclosed price believed to be less than a fifth of the value of the $100 million in real estate bundled into the deal for the paper. A few years before the fire sale in San Diego, the daily might have fetched something in the very high nine figures, if not a full billion bucks.
Publishers gasped and newspaper brokers gagged in 2010 when I reported that the value of The Daytona Beach (Fla.) News-Journal plunged to $20 million from $300 million in just four quick years. That means the paper was valued at 3x its EBITDA in 2010 vs. 29x in 2006.
Considering the outlook for the industry, the average enterprise value of 5.6x EBITDA for the publicly held publishers at the end of March is about as good as it gets, according to a bottoms-up analysis completed by Moorgate Partners, a New York-based investment banking firm specializing in media.
"I don't see a good trend for newspapers," said John P. White, a partner in the firm, who projected the likely future revenues, expenses, and profits of the public companies.
While some publishers may pay premium prices from time to time for strategically valuable acquisitions that either eliminate a competitor or achieve significant operating efficiencies, White pegs the intrinsic, long-term enterprise value of the average newspaper at no better than 4.5x EBITDA - or a full multiple higher than where they stood as this column went to press.
There's no mystery behind White's reservations: With an ongoing erosion in advertising cutting industry sales almost in half since 2005, he says newspapers are burdened with unavoidably high fixed costs for content-gathering, newsprint, production, and distribution at the same time digital competitors - unencumbered by such overhead - are building profitable, reader-pleasing businesses.
The only way for publishers to combat the deteriorating value of their assets, White said, is "to find other ways to capture subscriber-based businesses."
But we already knew that, didn't we?
© 2011 Editor & Publisher