Sunday, January 07, 2007

Metro-paper values plunge 48%

The Minneapolis Star Tribune evidently is being sold at a lower valuation than originally reported, meaning that the value of metro newspapers has fallen by 48% in less than two years.

Contrary to initial reports on the surprise sale of the Strib for $530 million, the Wall Street Journal now states that the Twin Cities title is being shed by McClatchy for 6.5 times its operating cash flow. Wall Street analysts originally estimated the transaction at 7.4x earnings. McClatchy in 1998 paid $1.2 billion, or a reported 16x cash flow, for the paper, the 15th largest in the land.

The value Avista Capital Partners placed on the Strib is a staggering 48% less than the 13.5x cash flow that Lee paid in 2005 when it bought the St. Louis Post-Dispatch and the rest of the Pulitzer chain.

The Pulitzer transaction stands as the contemporary high-water mark for newspaper values – and the dramatic drop in two short years is another measure of how deeply newspapers have fallen in the esteem of the financial community.

The cash-flow multiple is a common metric used by investors to determine what a company is worth. Cash flow is the difference between a company’s revenues and certain expenses. It is known formally as EBITDA, which stands for earnings before interest, taxes, depreciation and amortization.

The EBITDA multiple represents the degree of investor confidence in a company’s ability to increase its future profits. If the company is believed to have strong prospects to grow its sales and profitability, investors assign high, double-digit multiples to its cash flow. The shares of Google, for example, trade at 34.3x the EBITDA it realized in the last 12 months.

When investors believe a company’s earnings prospects are stagnant, or, worse, falling, they cut the EBITDA multiple. Gannett, the largest publicly held newspaper company, is valued by the stock market at 8.4x its cash flow over the last 12 months.

To put these values in context, Exxon trades at 4.9x its trailing 12-month cash flow, while AT&T is at 7.7x, Caterpillar is at 10x and General Electric is at 23.4x.

In the rare times in the past when metro newspapers were available for purchase, trophies like the Star Tribune traditionally changed hands for multiples in the mid-teens, because metros operated in monopoly and near-monopoly conditions with commanding and predictable shares of local advertising revenues.

The Pulitzer acquisition, in retrospect, appears to represent the last gasp of that bygone era.

When Knight Ridder was forced by dissatisfied investors to liquidate itself in 2006, it sold for 9.5x EBITDA, or 30% less than Lee paid for Pulitzer.

One year after the KRI liquidation, Tribune Co. is valued at 8.4x amid the expectation that it, too, is destined to be taken private or sold. Thus, Tribune is trading at a 12% discount to the value at which KRI was sold. Spirited bidding over the Tribune properties could push the eventual sale multiple higher, if the company's managers can gin up the competitive auction that has eluded them to date.

Although Media News paid 11.5x EBITDA for the Northern California metros spun off by McClatchy in mid-2006, the higher price was made possible only because MediaNews knew it could achieve extraordinary operating efficiencies by merging the San Jose Mercury and Contra Costa Times into its already formidable footprint in the Bay Area. And that’s exactly what Media News has done.

Apart from such exceptional circumstances as the Bay Area consolidation, however, it appears that the ordinary market value of individual metro newspapers has been halved in the two years between the acquisition of the Post Dispatch and announced sale of the Star Tribune.

Small and medium newspapers with defensible positions in isolated markets will continue to command multiples closer to the industry’s historic highs for as long as they can sustain the sort of fundamentals that the metros formerly enjoyed. As the new media begin chipping away at the readership and revenues of smaller properties, their values could erode, too.

The upcoming sale of the Copley papers in the Midwest will be an excellent barometer of the market for mid-sized newspapers. If the Copley papers fetch significantly higher multiples than the Strib, which is likely, then the transactions will validate the emergence of a two-tiered market for newspapers.

Absent significant new circulation and sales successes at some big-city papers, however, the M&A market for metros could remain unprecedentedly unkind.