Is This The Time To Invest In Newspapers?

Philip M. Stone May 20, 2010 Follow on Twitter

Newspapers are reporting far more positive bottom lines these days, although for most it is because of the savings made on the cost side rather than a whole lot of additional ad revenue pouring in, but even so has the time come to start thinking of buying a newspaper operation? It’s probably no surprise that newspaper brokers say this is the time to buy, and prices are already off their lows.

Larry Grimes, president of WB Grimes & Company, says in his newsletter to sellers and prospective buyers that the all-important marker these days is cash flow. Not revenue. Cash flow. He told his readers, “The M&A markets have clearly bounced off their bottom. We are seeing renewed interest on the part of both strategic and private equity buyers. Many banks across the country are lending. With the uncertainty surrounding the proposed increase in capital gains slated for next year, it’s not a bad time to test the M&A waters.”

But, he says, give up any idea of basing your selling price multiples on revenues – it’s on cash flow at around 5x to 7x. “Cash flows have been the benchmark for several years now. Revenues still matter as do sales trends. However, it’s the cash flow being generated by the operation today that’s determining what price can be paid.” Or put another way, borrowers want to ensure that the current cash flow, not projected, supports the loan and then some.

He asked, “What about revenue and cash flow projections? Limited importance is placed on ‘futures’ as we are too early in the economic recovery to project trends. That said, sales growth is always good and those newspapers that can show a reversal of fortunes are in much better shape.”

Grimes specializes in mostly small market community dailies or weeklies and it is thought that market will recover before the metropolitan newspapers. And in those larger markets the valuations are still pretty grim. Just look at what happened last week  with CanWest newspapers, Canada’s largest group, that was sold to several US investment funds for the princely sum of C$1.1 billion, about one third of what was paid just 10 years ago. The next best bid was C$800 by the Torstar Group, publishers of the Toronto Sun which makes you wonder what value they put on their flagship newspaper.

Among the Canadian papers bought in that sale are such well known names as the Ottawa Citizen, the Montreal Gazette, the National Post, and the Calgary Herald. And to indicate the price was probably about right, there were many who thought the investment funds paid too much just as there were those who thought they got the newspapers for a steal.

And since it’s American financiers who have bought the properties – with a $700 million loan from JP Morgan as the major financing – you just know their goal is to make the cash flow as attractive as possible in preparation for an onward sale as quickly as possible or an IPO. Bottom line -- the desperately needed added investment in journalism to re-staff those local beats that got cut away by previous management are not going to return any time soon for financiers still look upon editorial as a cost center rather than the profit center that brings in the readers.

But what seems to be accepted by all is that print newspapers are no longer the cash cows that once were licenses to print money and those days of 30% plus annual margins are gone forever. Attention will focus on digital platforms, but in the short to medium term will there be enough revenue there to satisfy margins without even more cuts?

The public obviously like newspaper web sites with the Newspaper National Network  reporting that in the top 25 US markets unique visitors to newspaper web sites reached 83.7 million in April, a 10% increase from March. Of course that leads to the question of how to make money from such numbers and no one really has solved that one yet.      

There are mixed signals on how well the global economy is recovering but it does seem to be on the upside  which is the good news, but the uncertainty still is how much print will share in the added ad flow. And without that answer valuations will likely stay low, and current cash flow will remain the buzz words for some time to come.

But at least one major bank, JP Morgan, seems to believe newspapers today are good value. The bank had got burned by having such investment properties as Tribune, Freedom Communications, and Journal Register go into bankruptcy and had little choice but to exchange billions of dollars of bad debt into new equity. But it seems to like the newspaper business these days because besides that CanWest deal, it also has spent close to $400 million buying into Gannett, the largest US publisher, with the bank now its largest single shareholder holding 24.3 million shares – 10.3% of the company.

Swapping equity for debt with little choice is one thing, but actively loaning money for groups to buy newspapers when it had gotten so burned before, and actually investing in the shares of probably the best managed newspaper company in the country has to be seen as an industry positive. Is JP Morgan ahead of the curve?