Cerberus, Apollo Bidding for Digital First Media
First published at Capital New York
After one cost-cutting private equity company has spent close to half a decade wielding the knife at Digital First Media, how many new “efficiencies” might a second P.E. buyer find? That’s the question we may soon see answered, as the sale of Digital First Media’s winds toward a completion.
I’ve learned that two big private equity companies are participating in the penultimate rounds of bidding for D.F.M.’s papers. Cerberus Capital Management, with $25 billion in assets under management, and Apollo Global Management, with $164 billion A.U.M., both eye what would be the single largest sale of newspaper assets in recent history. DFM is among the five largest newspaper companies by revenue in the U.S.
Importantly, both firms would bid for the whole company. That’s been a prime goal of D.F.M., and its controlling shareholder, Alden Global Capital, since the board decided about a year ago to ready DFM for the market, which I reported on last April (Nieman Lab: “Digital First Media’s coming sale”).
It hired UBS to be its broker, as it formally announced its exploration of strategic options in September. Through the fall, would-be buyers of the whole company or its six designated regional clusters have received increasingly detailed financials, and poked at them, most recently in a series of conference calls with regional operating heads.
Neither Apollo nor Cerberus— both known for toughness at the negotiating table—will want to pay what D.F.M. chief executive John Paton has been seeking: a multiple of four to five times D.F.M.’s estimated earnings of $120-125 million.
Other buyers may be in the fray. Fortress Investment-backed News Media Investment (néGatehouse) spent freely last year, buying up Halifax Media’s 24 largely southeastern dailies for $280 million, three months after acquiring The Providence Journal from publisher A.H. Belo for $46 million. Just last week, News Media put forward a $151 million public offering, in part for acquisition; Fortress’ leadership has signaled its appetite for more.
And there are potential regional buyers. The most public is Philip Anschutz’s Clarity Media, which has made little secret of its interest in D.F.M.’s Denver Post and other Colorado properties. In fact, last month, Clarity published a prototype of the Rocky Mountain News, saying it was ready to bring the paper Scripps closed in 2009 back from the dead—in print, no less. Most see the prototype as a small digital bargaining chip to leverage a buy of the Post, but Clarity seems an unlikely winner if indeed the D.F.M. holds firm to the strategy of selling the whole company to a single buyer.
Both Apollo and Cerberus are value-oriented PE companies – seeking low-value, low-multiple deals that others stay away from. Both sport names borrowed from Greek mythology, the Sun God and the serpent-tailed, three-headed dog guarding the gates of hell, respectively. Analysts ascribe less difference than that heavenly and hellish nomenclature would imply to their individual business practices.
Cerberus’ recent media play has been in the tired Yellow Pages industry; it bought AT & T’s business in the space in 2012. Apollo sought two publishing businesses—Reed Business Information in 2008 and American Media, publisher of The National Enquirerand other titles, in 2011—but neither deal happened. Apollo bought entertainment content creator Core Media Group in 2011 and took control of Dutch multiplatform entertainment company Endemol a year later. It recently completed a deal to create the Endemol Shine Group, in combination it with 21st Century’s Shine TV house, bringing both the Endemol and Core Media assets into it.
What could a P.E. purchase mean for the papers—and their “digital-first” operations—themselves? By standard practice, Apollo and Cerberus quickly apply reorganizations to find cost-cutting efficiencies. Layers of management and staffing are taken out, centralization of processes are put in place and technology is used to cut the costs of pesky humans.
The big question, here, though, is how much is left to cut after one PE owner has already taken a swing?
All newspaper companies have seen massive cuts as digital disruption, abetted by The Great Recession, dramatically downsized the industry. An American daily industry that took in $60 billion in 2005 took in only about $36 billion last year.
If all have cut, the papers in this deal have seen more than their share of efficiency-wringing. Peer publishers will tell you tell that DFM looks “wrung out,” at least from a small distance. Further, in its hodgepodge of assets, large and small, and geographically diverse, DFM, like all newspaper companies across the far-flung U.S. is sub national scale, further complicating a business turnaround.
Though C.E.O. John Paton’s outspoken digital-first, print-last theories didn’t win many friends among his peers, he forced the bedraggled, post-bankrupt Journal Register company into the new millennium. Taking over in 2010, he issued digital video cameras to reporters and cut numerous legacy print costs.
“Stop listening to newspaper people,” he told his staff. “If print dollars are becoming Digital Dimes, then we better start chasing the Dimes.”
He applied the same strategies, though with more difficulty, and greater resistance, as he took the helm of the post-bankrupt Media News group in 2011. After a series of reorganizations, and one more bankruptcy, Digital First Media—this current collection of 75 daily titles—emerged as a single company at the end of 2013. Alden, which bought up pieces of the properties over time, came to control the company, supporting Paton’s vision, until it ran out of patience on its investment and decided to sell.
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The properties have already seen round after round of layoff, with some of the Los Angeles papers’ offices described as ghost towns. The Mercury News, once considered among America’s top 10 dailies, has seen its staff shrink from more than 400 to less than a hundred. This very week, layoffs continue at some papers unable to meet their profit number.
Further, all of John Paton’s consolidations themselves stood on the shoulders of previous cuts, under MediaNews founder Dean Singleton (who brought cluster-based cost-cutting into the industry) and Journal Register management.
The would-be buyer of the D.F.M. properties will have a hard time projecting the next three years of revenue, given a freefall in print-ad revenues and slowing growth in the shoots of their new businesses (Thursday’s Newsonomics column: “The Newspaper Industry’s $1.4 Billion Money Hole“).
What then might be the theory of acquisition? It’s a bit mysterious, and, expectedly, both Cerberus and Apollo refused comment on this story. UBS offered no response on the negotiations.
Growing revenue is tough, and no one’s found any new rocket fuel. Further deep cost-cutting only makes the print and digital news products less appealing to paying readers and advertisers. Perhaps Cerberus or Apollo will bring new technologies to bear with a vengeance or cut print days of publication as Advance Publications has done.
Whatever it does, the goal will be to take a 3.5 multiple, for instance, and turn it into a 4.5 multiple, in short (three– to five-year) order. As much as a PE buyer looks at a low-cost entrance, its planned exit is the major goal. Other PE newspaper buyers — Blackstone, Providence Equity Partners, Angelo, Gordon & Co. and Alden, among them — have found their own exits less lucrative than they have hoped, over the past number of years.
Where will the price end up on this sale?
Is it a well-timed one, or as some have called it, a “fire sale”? Price could well drop into the threes, in terms of its multiple, especially, if as some conjecture has had it, Cerberus stops short of the final bidding. If, in the end, it’s a single P.E. company left in the hunt, don’t expect that company to bid against itself. We could end up seeing a game of lowball, with D.F.M. forced to face the reality of a lower single price as the cost of avoiding the complexity of selling off its individual regional clusters, some of which clearly have more value than others.
