So Much Attention Has Been Paid To The Problems of Daily Newspapers That The Success Of Weeklies Has Been Forgotten – But Not By The Smart Money

Philip M. Stone April 3, 2007

For all the doom and gloom told time and time again about US newspapers, there is one sector that is actually doing very nicely, thank you very much. How about 6-10% revenue growth in 2006 and profit margins holding steady. No wonder it is the weeklies that are getting the attention of the smart money.

Whereas McClatchy conducted a fire sale in December for its largest daily metropolitan newspaper, The Minneapolis Star Tribune, and the New York Times Company revalued the Boston Globe down by some $800 million, “Sales prices paid for weeklies are at or near their historic highs,” according to Larry Grimes, president of newspaper broker WB Grimes & Co.

So perhaps it’s no coincidence that the new newspaper darling of Wall Street, GateHouse Media, has built its empire based on 76 small daily newspapers with a total circulation of 386,000 (an average of 5,216 circulation per newspaper),  and 226 weekly newspapers with total paid circulation of 525,000  and free circulation of 447,000 (average weekly circulation of 4,433). It also has 113 shoppers with a total circulation of 1.9 million.

And even big, mighty News Corp. has gotten into the weekly game in buying last September the TimesLedger Newspapers, a chain of 16 weekly newspapers in the New York borough of Queens and Courier-Life Publications that had 11 weeklies in Brooklyn.

News. Corp had an ulterior motive. While its New York Post does well within Manhattan proper it advertising volume and distribution suffers in the boroughs against its arch-rival Daily News.  So the brilliant idea was to use the weeklies to provide synergies between the metropolitan newspaper and the community papers, by offering converged advertising packages and where the Post’s suburban distribution is weak it can offer advertising opportunities at a steep discount in the community newspapers as a substitute.

But even if all of that advertising convergence doesn’t work out, News Corp. management have made clear that they will fall back on Plan B – enjoy the revenues that the weeklies are earning anyway.

Weeklies do seem to be moving from one strength to another. Grimes, the newspaper broker, explained in an email exchange with FTM: “The weekly newspaper business is thriving in the US and has been somewhat insulated from the Internet issues that have plagued the daily newspapers. This is due to a number of reasons including among others, the strong household penetration on the part of the weeklies in their markets (it is not uncommon to see a weekly with 75%-90% penetration in their target market); a rate and distribution model that caters to the smaller, local advertiser whose target market is with a 5-10 mile (8-16km) radius of his/her location; superior coverage of local news, politics, high school and youth sports, the schools and entertainment and down to the neighborhood level; the fact that the reader does not feel compelled to read the newspaper the day it is delivered – a weekly remains a viable read 3-4 days after delivery.”

And he points out those are reasons why not just News Corp., but other big groups are now eyeing the weeklies. “Weeklies have garnered the attention of both strategic buyers and groups seeking to develop clusters within a geography. For the dailies, the weeklies have become an important add-on buy in markets where the daily household penetration is not sufficient to meet advertiser demand. The weeklies have shown they can more than compete for the local and regional advertising dollar and as a result are very much in demand by group as well as an individual buyer’s targeted growth as well as stable markets.”

With eight offices across the US, Grimes has his finger pretty much on the weekly pulse. “Our weekly clients are regularly reporting revenue gains of between 8% and 10% annually for the past three years. Most are seeing solid gains already in 2007. Expenses have been kept in check so cash flows are typically rising. This has translated into a strong seller’s market with multiples to cash flow paid rising to between 6 and 10 times; we have already seen deals above that number.”

But that doesn’t mean there couldn’t be problems ahead. Should the sub prime lending issues filter down to general commercial lending then that might put some potential newspaper buyers on the sidelines. If interest rates go higher then multiples could head south.

Real estate advertising is important to the weeklies, so the current housing downturn could affect that revenue stream.

And if there was to be an overall economic downturn with consumers curtailing their spending, then that could eventually trickle down to weekly newspapers. “And should the daily newspaper market deteriorate much further, we may see the dailies put on hold any acquisition plans,” Grimes said. “This would limit the number of strategic buyers for a given property, but in turn would open the door for the more aggressive weekly group buyers to enter markets they may have previously considered iffy.”

Gary Pruitt, CEO of McClatchy, for instance has made clear in the past few days that after his Knight-Ridder adventure last year he’s had enough of newspaper investments and is now looking at the Internet. McClatchy’s online revenue grew 22% in 2006 but that still represents less than 8% of the company’s overall revenues. Weeklies apparently are not on Pruitt’s radar. It’s the Internet.

Pruitt told Bloomberg he is interested in striking partnership deals with the likes of Yahoo and Google, and buying stakes in various web sites. With its newspaper advertising down 5.5% in the first two months of the year, and with its shares down 36% in the past year, print seems like the last investment now on Pruitt’s mind.

But with Gatehouse Media still on the prowl, and even foreign companies from as far away as Australia also into the market, the weeklies are beginning to attract some real attention by those in the know.

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