A Newspaper Buying Spree: Despite Their Declining Value and Much-Publicized Woes, Papers Are Attracting Interest
Morton, John, American Journalism Review
In the not so distant past, the more valuable newspapers became, the more eager sellers and buyers became to do deals. Today newspapers are far less valuable--by half or more--yet sellers and buyers are once again finding each other in great numbers.
When the future of newspapers seemed bright, with apparently never-ending cash flow growth and steadily increasing values ahead of them, acquiring the print products seemed like a no-brainer. Banks bought into this scenario, and acquisition money was easy to borrow.
Then came the Internet. When broadband coverage of households began to surge in 2004, advertising began to drift away from newspapers. In just four years, starting in 2006, the newspaper industry's advertising revenue dropped more than 50 percent, and is still eroding, although the rate of decline has slowed thanks to easy comparisons.
The drying up of the revenue stream that historically contributed three-quarters of newspapers' revenue (it's down to about 60 percent now) had a grievous impact on operating profit margins, dropping them from over 20 percent in the early-to mid-2000s to around 10 percent today. (Those figures are based on data from publicly reporting companies as a proxy for the industry.) Not surprisingly, banks are no longer so eager to finance newspaper purchases.
So where is the money coming from to fund the current wave of acquisitions? And what do the buyers see that banks apparently do not? Well, it is worth pointing out that, at the right acquisition price, a 10 percent operating profit margin, or even a couple of points lower, is not unattractive. Some industries don't hope to achieve 8 to 10 percent margins in the best of times, and here are newspapers reaping them in what for them has been the worst of times.
Back when newspaper margins were soaring, acquisition prices were also high as measured by multiples of revenue or cash profit (so-called EBITDA, or earnings before interest, tax, depreciation and amortization) or average daily circulation unit. For example, a newspaper's sales price back then might be equal to one-and-a-half to two times its annual revenue (or 13 to 15 times its annual cash profit), or $1,000 to $1,500 per unit of average daily circulation--a week's total circulation divided by publishing days. These were typical ranges of the multiples back then, although some individual sales could be higher or lower.
Now that most newspaper profits are down by half or more, it is understandable that their valuations are likewise down, as are the multiples of revenue, cash profit and circulation when they are sold. …