Would You Want To Buy A Newspaper Business These Days?

Philip M. Stone April 14, 2010 Follow on Twitter

Owning a newspaper once was likened to owning a license to print money – margins above 30%, fabulous cash flow -- it was a great business to be in. We won’t dwell on the past few years when that stack of cards came tumbling down, but as the world appears slowly to be coming out of its recession perhaps it’s not a bad time to ask whether now might be the time for newcomers to embrace the newspaper business again?

Prices are low – multiples of 5 to 6 times annual earnings – and there is a lively debate going on whether some newspapers are now at fire sale prices considering that a federal judge in Florida recently approved a valuation of $20 million for a newspaper that back in 2006 was valued at $300 million. That was yet again proof that it doesn’t matter how much something used to be worth but rather what someone today is willing to pay, and in the case of that Daytona newspaper it was only $20 million, but that doesn’t necessarily means all newspaper values have dropped by more than 90% in four years. 

Larry Grimes, owner and president of W.B. Grimes & Company that specializes in the sale of weekly and small daily US newspapers, admits that over the past two years as bank lending dried up coupled with a lack of a secondary lending market, and with the economy hitting hard even local newspapers that had been thought best-placed to weather the storm, that there were great deals to be made if the buyer had the cash, but prices are now firming.

“Yes, revenues and cash flow at most publishing operations are down significantly from their 2007 highs. You aren't going to get today what you would have received two years ago when your numbers are down.   Transactions we've recently completed indicate weekly multiples bottomed a year ago, with the range now in a 5X-7X multiple to earnings. Interestingly, we are finding many banks ready to lend.  Obviously there must be enough cash flow, day one, to cover the debt service dictated by the deal terms,” Grimes said in a recent client newsletter.

But even if you’re able to agree the financial terms of a deal at the 5x-7x level, and even if you could cover the debt with current cash flow do you really now want to be in the newspaper business in this day and age?

The answer may boil down to your definition of “newspaper”. If you are talking just print then it’s going to be real dicey. In the weekly and small daily circulation field the feeling had been pre-recession that those print properties would be safe – local business would continue to support local news in print and not too much of that spend would shift to digital. But while the local press may have been the last to get really hit, hit it did get. But as the recession picks up that local press should be among the first to recover.

But is there a life in just print? The smart money seems to be differentiating between “newspaper” and “print” by saying there may be a limited time left for “print” but newspapers can very well survive at much less cost on such digital platforms as Kindle and iPad.

The current problem right now is that while those platforms currently work technically the jury is out about their profitability.  iPad, for instance, takes 30% of a sale and last year Dallas Morning News CEO James Maroney told a Senate subcommittee on the future of newspapers that Amazon’s Kindle wanted 70% of his newspaper’s subscription on that platform.  That’s tough because the news industry had trained digital readers that digital news was free via the Internet, so weaning them to pay for that same information on the likes of Kindle and iPad is going to be difficult at best, the price probably needs to be very low, and if you’re giving a big chunk of that away to the platform owner then that makes finances real dodgy.

Having said that, no less than Rupert Murdoch said this week he sees the iPad and its brethren as the salvation of newspapers. “If you have less newspapers and more of these …it may well be the saving of the newspaper industry,” he told an industry gathering in Washington.

Even more extraordinary when you consider that it was just two years ago in the UK that Murdoch’s News International completed what the company called its cathedrals of technology – three state-of-the-art printing plants at a total cost of £650 million (then $1.3 billion, €845 million) that would give his four national newspapers and others who would sign up including the Daily Telegraph, full color capability on every page.  That was about as strong a backing one could give to the print newspaper business; after all, talk is cheap but £650 million is, well, £650 million, yet here is Murdoch now saying the iPad is the future and less print is fine! Makes you wonder if he knew back in 2004 when he gave the go-ahead what he knows today about newspapers whether that project would have gone forward.

News Corp chief digital officer Jonathan Miller calls the iPad a “media consumption device.” In order to get the pricing costs by platform holders down obviously market forces dictate there need to be a whole lot more media consumption devices out there. If the price of the hardware drops so the masses can buy, and if the “cut” the platform holders want gets reduced substantially and if the technology advances so the advertising becomes truly dynamic then perhaps these consumption devices may well be the salvation for newspapers.

Meanwhile the various advertising giants are hiking their global advertising forecasts for this year and beyond but look closely at what they’re saying and most of the growth will be for the Internet followed by TV while newspapers are expected to see their overall share continue to diminish.

Newspapers have been reporting better numbers since Q3, but only because they finally have a handle on the cost side, and advertising revenue still declines, albeit not at such a furious pace as a year ago, but it is still going down. The US earnings Q1 reporting season is now upon us and soon the likes of Gannett, McClatchy and others will tell us how they are doing this year – likely that advertising continues improvement but costs must continue to be nailed.

So, with all of those unknowns still out there, you think buying a newspaper these days at a low price is a good investment?