It’s Time The Media Quit Wasting All That Money On Share Buybacks, And Put That Money into The Internet Instead

Read the most recent financial results for traditional media companies and one trend stands out – traditional growth is one or two per cent at best, but Internet revenue growth is well into percentage double digits.

So if companies really want to enhance shareholder value they should put that money where it will do them the most good – and by all accounts that now means investing in Internet properties.

What newspapers should be looking for is to increase their Internet revenues which now probably make up less than 6% of their overall revenues depending on what they own and when they started, to around 20% within the next three years.

ftm background

Lee Bought Pulitzer Last Year for 13.5 times Earnings Yet McClatchy Paid Just 9.5 times Earnings For Knight-Ridder. What Does That Tell You About the Value of Newspapers Today?
That someone, it happened to be McClatchy, paid about $67.25 a share for Knight-Ridder -- some $4.5 billion plus absorbing K-R’s $2 billion of debt -- was about what the markets expected. But where was Gannett and all those private equity companies that were expected to put in bids? The word is they dropped out, which gives as good an indication as any that newspaper valuations are not what they used to be.

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

Now That Knight-Ridder Is Officially For Sale, Two Questions Emerge: Who Would be Foolhardy Enough to Buy Newspapers These Days and Which Major Media Group Will Next Feel Shareholder Pressure To Sell Itself?
Knight-Ridder didn’t have much choice. With its three largest shareholders representing some 36% of the shares telling the company to explore ways of selling itself and threatening board changes if it didn’t, it hired Goldman Sachs to scout out the market.

“Private Capital Management (PCM) Has $4 Billion Invested in US Newspapers. What Do They Know That We Don’t”? – FTM Sept, 2005; PCM Tells Knight-Ridder To Put Itself Up For Sale
In what must be considered a very gloomy assessment of the US newspaper business, one of its largest institutional investors has seemingly lost patience with the industry being able to turn itself around, and has now urged Knight-Ridder (K-R), the country’s second largest newspaper chain, to put itself up for sale.

Wall Street Says That Newspaper Industry Valuations Are Underperforming the Market. But Don’t Buy, It Says They’re Going Down Even More
Even though newspaper industry shares have underperformed the US markets by some 10%, looking like a buy bargain, Merrill Lynch has issued a report that says the shares basically have only one direction to travel and that’s down.

And while some publishers have indeed invested hundreds of millions in buying new sites they still invest huge amounts buying back their own shares to keep big shareholders happy. Actually, what shareholders want are higher earnings based on higher revenues rather than companies canceling shares to increase earnings per share on the same revenue simply because there are less shares on the market. Since traditional media isn’t going to provide that growth then the money needs to be invested in that media that will bring in higher earnings – and that means the Internet.

Furthermore, credit rating companies are not enamored by media companies borrowing huge amounts of money to buy back shares. And while there are debt ratios to worry about they are happier to see money spent on something that is going to bring in future growth rather than to borrow money to throw into a stock market pit.

Some media companies are becoming more savvy about the importance of Internet investments than others. In Australia, for instance, John Fairfax Holdings, the country’s second largest newspaper company, is adamant that future growth comes from the Internet and not newspapers. Not difficult to understand why when revenues at Fairfax Digital jumped 67% in the first half ending Dec.31, 2005. For its Australian newspapers, that comprise more than 80% of the company, ad revenue growth in the same period was 1%. David Kirk, the new chief executive of the group, says he wants to see digital’s contribution to group earnings jump from the current 4% to 20% within the next two years.

In the US those companies that spent hundreds of millions on web sites are all reporting huge advertising growth from those sites although as an overall part of the company’s revenues they are still under 10%. But there is enough experience there now to see that the existing properties are going to do even better as web advertising rates continue to grow almost monthly on those sites that pull in the largest page views, and it is not rocket science to figure out that a few more such sites in the portfolio will boost those earnings even more in the future.

The problem, of course, is that web owners also understand the value of their sites, and these properties are not going cheaply. Although having said that, when Ruupert Murdoch bought MySpace for $580 million last year many people said he way overpaid, and yet today News International officials that may have been one of their biggest bargains.

The latest earnings report from the New York Times Company sums up the situation. It’s Internet business in the first quarter was worth $62 million, 7.5% of the company’s overall revenues compared to 3% just a year ago.

About.com, that the Times acquired just a year ago for $410 million, increased its revenues by 98%, it had 55 million unique visitors in March, 40% more than last year -- and had a $7.6 million profit on $18.8 revenue. Company officials claim that at a minimum the site will continue with its 40% profit margin..

Newspapers, we know, were good businesses at around 20% profit margin. Many of the most popular Internet sites are seeing 40% plus profit margins. It’s where the money needs to go.

Even TimesSelect, where the New York Times put some of its most favorite columnists behind a pay wall of $49.95 a year for non-print subscribers, is turning in good money. It has some 465,000 subscribers with about 38% paying the annual fee – that equals near $8 million.

The company also admits that although its overall ad revenue grew 3.9% in the first quarter if you stripped out about.com the increase was just 0.7%.

Dennis FitzSimons, ceo of Tribune, sees those types of numbers at his competitors and the numbers from his own company and he has apparently come to the conclusion that he wants to get more involved with Internet properties. And to buy more properties he wants to redirect some of the money consigned to share buybacks.

In announcing his company’s poor first quarter results – earnings down to 33 cents a share from 44 cents the previous year, operating revenue down 1%, and flat newspaper advertising revenue -- he said he wants to see digital revenues double within three years.

Digital revenue is currently is around $350 million -- currently 6% of overall ad revenue -- and FitzSimons says his goal won’t be reached organically – he’s now on the lookout for more Internet properties.

He says to buy them he is cutting back on share buybacks -- in the first quarter alone Tribune spent $138 million on buying back 4.6 million shares. The company had said it planned to buy back some $350 million to $400 million of its shares which it says are vastly undervalued -- they hit an almost eight-year low this month. .

The problem for Tribune is that to get one of those sites that explodes revenues like about.com and MySpace the price will be north of $500 million. Not that the company has liquidity problems but analysts are urging it to sell an existing business rather than borrow more.

Tribune owns the Chicago Cubs baseball team that some analysts say doesn’t fit into a media company’s portfolio and it should be sold. Management disagrees, however, saying there is great convergence between the Cubs playing ball and the company’s radio and TV stations broadcasting those games.

Financial analysts are not by any means convinced that share buybacks are a policy to be given up lightly. Indeed, one of Wall Street’s most respected media analysts, Lauren Fine of Merrill Lynch, criticized "a seeming reticence on the part of management to try to surface value through either asset sales or more material dividend or share repurchase proclamations."

Be that as it may for the past two years many media companies have given a lot of money back to shareholders one way or another and yet their shares still languish near all-time lows. What investors really want to see are prospects for growth earnings. It is because they don’t see those growth earnings prospects that they mark the shares down.

There seems to be little opposition these days to the view that the traditional media business has basically stopped growing and future prospects are dim. Everyone knows the Internet is where the growth is. And that’s where the share buyback money will do the most good for all concerned.