Have You Noticed Which US Newspapers Are Getting The Really Smart Investment Money? Think Local, Local, Local

Who is doing it? Well, a large Australian group just spent $80 million gobbling up 40 such newspapers in Texas and Oklahoma, and a former Australian, one Rupert Murdoch, is busy buying up local newspapers surrounding Manhattan. And there’s GateHouse Media that has a $1 billion war chest to buy up local papers.

What’s the allure of local community newspapers? For one thing on average around 75% of their advertising revenue comes from display advertising, and the revenue for that increases on average around 10% a year. So local newspapers that never had a lot of classified advertising to begin with have not been particularly hurt by the likes of Craigslist, unlike their big-city cousins.

Editorially they are a great success because they are so very, very local in their coverage. To paraphrase Ned Cantwell, a journalist who spent all of his journalistic life working on local newspapers, they’re all about noting a child’s birth, reporting who won the local spelling contest, who threw, and who caught the winning touchdown in the big high school football game, who got married to who and who was there, promoting the local city-backed annual festival and the like. As the British would say, very parochial.

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It’s information so local that it is really of interest only to that local community – but those folks are really interested in it – and you just won’t find most of that information anywhere else unless it might be on their own web site.

And none of that went unnoticed as far as away as Australia where the Macquarie Media Group last month bought American Consolidated Media (ACM) for US$80 million.

ACM publishes 40 local newspapers which serve nine regional communities in Texas and Oklahoma. Macquarie Media managing director Alex Harvey said the acquisition was part of a broader strategy to acquire and grow a portfolio of community newspaper businesses in the US.

"We have identified community newspapers as an asset class which meets our investment criteria, generating stable cash flows from predominantly local advertisers, with low dependence on circulation and classified advertising, limited capex requirements and potential for earnings improvement through organic growth and consolidation," he said.

That explanation is probably why GateHouse Media, based in Fairport, New York, has been busy buying up 445 community newspapers in 18 states, which with their 235 web sites means a reach of some 9 million people weekly. It has raised $1 billion in financing to buy additional local newspapers.

Harvey says there are about 1,200 daily and 6,600 weekly community newspapes in the US but only 12 companies that own more than 25 titles.

“The vast majority of the industrry is still family owned and to some exrtent a cottage industry, and the opportunity to aggregate aropund a high-quality management team is an exciting proposition,” Harvey said.

ACM's 40 publications comprise five daily papers and 19 weekly papers, as well as 16 "shopper" and specialty publications. It claims to have an average weekly distribution of about 555,000, reported in 2005 revenue of $32.3 million with earnings before interest, tax, depreciation and amortisation of $8.7 million. Small potato, as they say, but very good margin.

Meanwhile, in the suburbs surrounding Manhattan no less than Rupert Murdoch is buying up community newspapers. In his case the strategy it to use the community newspapers to help make his metropolitan New York Post profitable. If for some reason that doesn’t work he then goes to Plan B which is to operate those community newspapers as very nice proftimakers in their own right.

He started off by buying 28 community newspapers in the Brooklyn and Queens suburbs of Manhattan for around $16 million. News Corp is now said to be in negotiations to buy The Bronx Times Reporter, which is one of that borough’s main publishers of community weeklies.

Murdoch’s priority is to stop the red ink at the New York Post. The Post does well in Manhattan but its arch competitor, The Daily News, does better out in the boroughs. By buying the weekly suburban chains located in the News’ stronghold, the Post can work on synergies between the metropolitan newspaper and the community papers, not just journalistically but by offering converged advertising packages.

And already the scheme seems to be working. Cingular Mobile used to advertise in The Daily News because of its suburban distribution. It has now switched to the Post in a deal that sees its ads not just there but also in the community newspapers. No details on the deal’s financials but obviously the Post is countering its lack of suburban distribution by offering the community newspapers as substitutes, probably at steep discount. The Cingular account was worth around $7 million to the Daily News, according to TNS Media Intelligence.

Community newspapers are usually a bit fragile. Part of the Macquarie deal was that the management stayed pretty much in place. They know their communities; they know what works and what doesn’t. Don’t mess with success.

News Corp. has already invested in its community newspapers with redesigns and upgraded printing. And it hired the senior management to stay on and manage the papers. But as a sign of how it is difficult for a truly global player to treat local newspapers any different than it does anything else, it has already started the firings to get the costs down.

Have You Noticed Which US Newspapers Are Getting The Really Smart Investment Money? Think Local, Local, Local

The headlines are all about how terribly the large metropolitan newspapers are doing financially. But look further and you’ll see that the really smart money is still being invested in newspapers but at the very very local community level.