Monday, May 12, 2008

Cablevision overpaying for Newsday?

Cablevision is valuing Newsday at more than twice the amount Rupert Murdoch thought it was worth, according to a side-by-side comparison of the two deals.

While the Cablevision offer for Newsday appears at first to be “only” $70 million more than the $580 million originally offered by News Corp., a proper comparison of the deals has to take into account the considerable benefit that News Corp. would have achieved by consolidating certain operations of the Long Island daily with those of its New York Post.

But Cablevision won’t be able to take advantage of most of the administrative, sales, production and distribution synergies that Mr. Murdoch said would have added an additional $100 million to the annual cash flow of $85 million that industry insiders believe Newsday produces.

If you divide Mr. Murdoch’s $580 million offer by $185 million in enhanced cash flow, he would have bought the paper for a bit more than 3 times its projected future operating margin. When you divide Cablevision’s offer of $650 million by the existing $85 million in cash flow, the cable company would be paying more than 7.6 times Newsday’s earnings.

In other words, Cablevision has agreed to buy Newsday for nearly 2½ times more than the value placed on it by the most daring and sophisticated publisher in the world. Do Charles and James Dolan, the father-son team leading Cablevision, know more about newspaper publishing than Rupert Murdoch?

Even discounting the improved profitability that News Corp. projected for the combined publications, the price Cablevision is paying for Newsday still seems too high.

While it is not easy to make an apples-to-apples comparison among newspapers in different markets, the case of the Minneapolis Star Tribune is instructive, because it, like Newsday, was a free-standing acquisition that was not consolidated with a neighboring property. (Unlike Newsday, it also was not destined to be partnered with the dominant cable television company in its market, the bold but untested strategy planned by Cablevision.)

The Strib was purchased by a private investment group for 6.5x cash flow in December, 2006, when it was generating almost the same profits (approximately $81.5 million) as Newsday does today. But the deal soured rapidly, with the paper’s sales slipping a reported 14%, operating profits falling by at least a like amount, its bonds trading today for barely 50 cents on the dollar and its investors writing off 75% of their equity.

In the 18 months since the Star Tribune was purchased, the value of newspapers has plunged so much that even the some of most well-regarded publishers in the country have been forced by accounting rules to drastically reduce the book value of their recent acquisitions. Among them:

:: The New York Times Co. wrote off 58% of the combined $1.4 billion it paid to acquire the Boston Globe and its sister papers in New England.

:: Lee Enterprises wrote off half of the nearly $1.5 billion it paid to acquire Pulitzer Inc. in 2005.

:: McClatchy wrote off three-quarters of the $4 billion it spent to buy the several Knight Ridder newspapers it purchased for 9.5x cash flow in 2006.

Given this treacherous environment, Cablevision's brass may have a tough time selling their shareholders on the rationale and pricing for this deal.


Anonymous Anonymous said...

Hmmmm. The latter argument about plunging newspaper values is more persuasive than the beginning part of the argument. I almost spilled my Diet Coke over the line about Murdoch being "the most daring and sophisticated publisher in the world." Bit wide of the mark, no? Murdoch notoriously overpays, as he did for TV Guide. But look at it this way: He paid $5 billion for Dow Jones, a company that earned maybe $150 million in its last year. Using that yardstick, paying $650 million for a paper that made an $80 million profit last year seems like an utter bargain, no?

12:24 PM  

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