Monday, August 12, 2013

The surprising boomlet in newspaper M&A

Beyond the headline-grabbing purchases last week of the Washington Post and Boston Globe, there has been a surprising recovery in M&A activity in the last 1½ years involving newspapers in places like Vicksburg, MS; Everett, WA; Nashua, NH, and Waco, TX. 

The boomlet has been fueled by an improving economy, the growing desire of many long-time family owners to exit the publishing business and the arrival of a variety of well-heeled newcomers who believe there is continuing value in the venerable local publishing model – so long as you buy into the business at today’s historically low prices. 

Not counting the $250 million sale of the Post and $70 million disposition of the Globe, there were 40 newspaper transactions involving 101 daily publications between January, 2012, and the end of last month, according to Owen Van Essen of Dirks, Van Essen & Murray, a media brokerage firm. Van Essen recaps the newspaper deals in the first half of this year here.

The merger-and-acquisition activity in the last 19 months is a considerable improvement over the combined 21 transactions involving 84 dailies that took place in the full years of 2010 and 2011. Van Essen says the best year ever for newspaper M&A was 2007, when there were 30 transactions involving 91 daily newspapers. 

Even as media giants like Gannett Inc., 21st Century Fox (nee News Corp.) and Tribune Co. have sought to de-emphasize or sever their newspaper holdings (for reasons previously discussed here), the market is reasonably healthy for newspapers serving isolated communities in relatively competition-free markets. 

The sweet spot in the revitalized M&A market most assuredly is not metros like the Globe, which is being sold for 5% of the aggregate $1.4 billion the New York Times Co. spent to buy the iconic newspaper and the neighboring Worcester (MA) Telegram & Gazette in, respectively, 1993 and 1999. The drastic devaluation of the Globe is not unique:

∷ Purchased for $1.2 billion by the McClatchy Co. in 1998, the Minneapolis Star Tribune was sold for $530 million in 2006 to a group that went bankrupt. When the business was bought out of bankruptcy in 2012, it went for $119 million, or 10% of its value in 1998.  

∷ After being owned for years by Knight-Ridder, the Philadelphia Inquirer and Daily News were sold for $515 million in 2006 and then went bankrupt twice.  After the first bankruptcy, the papers were sold for $139 million.  After the second bankruptcy, the titles were sold for $55 million, or slightly better than 10% of their value just four years earlier. 

In light of these sobering outcomes, you can see why today’s newspaper buyers are looking for strong franchises in economically healthy communities that are geographically, culturally and emotionally remote from the sagging revenues, declining readership and receding profitability that encouraged the Graham family to sell the Washington Post to Amazon founder Jeff Bezos in the hope that an astute digital native could pilot the paper to a sounder future.

By most accounts, the appetite for newspapers is healthy in the boonies.  “The buyer pool is much larger for standalone mid- and small- market newspapers today than it was a year ago and that is what is making the difference,” said broker John T. Cribb in a recent newsletter. “There is just more competition for these type of properties and they are being purchased by people who believe in the industry and are staying in it.”  

Some newspapers, like the ones in Vicksburg, Everett and Nashua, were purchased by such long-time, privately held publishers as, respectively, Boone Newspapers, Black Press and Ogden Newspapers. But a small number of well-financed newcomers have entered the marketplace to liven up newspaper auctions. 

The most prominent, and ardent, of the new newspaper buyers is Warren Buffett, a former newsboy who once beat billionaire buddy Bill Gates in a newspaper-throwing contest.  

After buying his hometown Omaha World-Herald in late 2011, Buffett tasked the management of the paper to acquire additional newspapers through a new entity called BH Media Group. At this writing, the acquisitive group operates 68 newspapers and other titles in Alabama, Florida, Iowa, Nebraska, North Carolina, Oklahoma, South Carolina, Texas and Virginia.  Acquisitions have ranged from the aforementioned daily in Waco to properties in Roanoke, VA; Atlantic City, NJ; Tulsa, OK, and beyond.

“I love newspapers and, if their economics make sense, will buy them even when they fall far short of the size threshold we would require for the purchase of, say, a widget company,” Buffett told his shareholders in March. “At appropriate prices – and that means at a very low multiple of current earnings – we will purchase more papers of the type we like.”

BH Media is not the only new holding company to enter the newspaper business in recent years. Others are: 

Halifax Media.  Founded in 2010 by Stephens Capital Partners, JAARSSS Media and Redding Investments, it has bought 33 newspapers published in Alabama, Florida, Louisiana, North Carolina and South Carolina, including most of the regional papers divested by the New York Times Co. in 2011. 

Civitas Media. Organized in 2011 by Versa Capital Management, the company rolled together four newspaper holding companies, including the former Heartland Media. Civitas operates 35 dailies and 63 weeklies in Georgia, Illinois, Kentucky, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. 

In addition to the serial acquisitions undertaken by the new holding companies and some veteran family groups, a number of wealthy individuals in recent years have stepped into newspaper publishing by buying one or two individual properties. Beyond Jeff Bezos, they include:

∷ Wealthy Red Sox owner John Henry, who is buying the Boston Globe. 

∷ Billionaire industrialist Philip Anschutz, who bought the Oklahoma City Oklahoman and the Colorado Springs (CO) Gazette. 

∷ Greeting-card entrepreneur Aaron Kushner, who bought the Orange County (CA) Register and not only invested in additional staffing and coverage but also is scheduled next week to launch a paper to compete with the incumbent daily in neighboring Long Beach. 

∷ Real estate developer Doug Manchester, who bought the San Diego Union-Tribune in 2011 from the private equity firm that acquired the title from the Copley family during the depths of the recession in 2009. 

∷ Entrepreneur Michael W. Ferro Jr., who bought the Chicago Sun-Times from another Windy City investment group that had been headed by the late investment banker John Tyree. 

∷ Businessman and restaurateur John Georges, who bought the Baton Rouge (LA) Advocate to compete with his hometown paper, the New Orleans Times-Picayune. 

The new newspaper buyers for the most part are purchasing properties from long-time family owners who have decided to exit the business after watching industry revenues slide from a record $49.4 billion in 2005 to $22.3 billion at end of last year.  

Though the revenue drop may not be as severe at small and medium papers as it has been at metros, many independent newspaper owners and small groups worry about having the financial wherewithal and technical knowhow to pivot to digital publishing. 

The new newspaper buyers are not only well financed but also can bring economies of scale and enhanced management to both print and digital publishing operations. 

Because they are financially sophisticated, however, the new publishers, like Warren Buffett, tend to be quite disciplined about the prices they are willing to pay. 

While the preponderance of recent newspaper auctions have attracted multiple bidders, prices are not moving much beyond 3.5 times to 4.5 times a propertys earnings before interest, taxes, depreciation and amortization (EBITDA), according to knowledgeable market sources. Thus, a newspaper with an EBITDA of $3 million likely would be worth $10.5 million to $13.5 million.  

The $250 million that Bezos is paying for the money-losing Washington Post represents an exceptional premium for an exceptional franchise that is not likely to lift the value of other properties, say most industry observers.   

However, cautioned experts, there are some circumstances where a buyer will pay more than the average multiple of earnings. This is most likely to occur when a publisher can cut production, sales, editorial, distribution, administrative and other expenses by consolidating the operations of a new acquisition with those of a nearby property already owned by the buyer. 

Even in those circumstances, prices are not likely to return any time soon to the mid-teen – and sometimes even higher – multiples that buyers eagerly paid for papers before ad sales commenced their seven-year slide. “The only way multiples will go up is when advertising sales start going up,” said one market participant. “When will that be? You tell me.”  


Blogger Unknown said...

In evaluating the price Jeff Bezos paid for WaPo, let's not forget the overfunding of its pension plans by more than $500M. The magnitude of pension assets and liabilities included in the sale is not yet clear, but the overfunding going to Bezos is presumably a significant fraction of the purchase price.

5:57 PM  

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