The Envelopes Open on the Sale of Digital First Media Newspapers
Valentine’s Day may be coming early for Digital First Media this week. DFM’s board and UBS, its broker, open the envelopes, looking for affection. It’s an uneasy love-me/love-me-not time, newspapers’ version of Match.com. Will DFM’s affection for the open market be returned, or will it be left searching love in all the wrong places? Rampant in the newspaper world this week: whispers, theories, and prognostications of how happy (or lovelorn) DFM will be by Friday.
DFM, and its most powerful owner, Alden Global Capital, would love to sell off the whole company in one sale. No muss, no fuss, less time and fewer costs. That is unlikely. Start with DFM’s motley collection of titles, diverse in both geography and circulation size, from big metros to small community papers. Add to that the current uncertain state of the newspapering business, and it’s tough to come up with a logical bidder for the company’s 76 daily papers and 160 weeklies across 18 states. (“The newsonomics of auctioning off Digital First’s newspapers (and California schemin’)”). How much would DFM like to get for a company it likes to say reaches 67 million readers monthly across 18 states, from New England to California? Figure $500 million. That’s based on a likely EBITDA (earnings before interest, taxes, depreciation, and appreciation) of about $125 million, for a company earning a 10 percent-plus margin. A half billion dollars represents a 4× multiple of those earnings.
Most likely: Bidders would offer up potential affection for the six clusters DFM has subdivided itself into, anticipating the likely need for multiple buyers.
Those six clusters:
— Southern California, the Los Angeles News Group properties
— the Bay Area News Group, the dominant group of 11 Bay Area dailies, including the San Jose Mercury News and the Contra Costa Times
— a NorCal group of smaller Bay Area dailies on the coast and I-80 corridor
— the Colorado/Utah group, consisting of nine Colorado dailies, including The Denver Post, and numerous weeklies, and the Salt Lake Tribune, a strong alternative to the Deseret Morning News whose survival has been in question
— a New Mexico/Texas group of smaller properties
— the Saint Paul Pioneer Press, still the main competitor to the Star Tribune in the Twin Cities, and many mid-sized to smaller dailies and weeklies in Michigan, New York, Ohio, Pennsylvania, New Jersey, and Connecticut, the largest of which is the New Haven Register
So now, midway through this sales process, what do would-be acquirers need? Let’s break that into parts.
First, they need more information. They’ve already been told that newspaper-related property will be sold off separately, as has been the trend over the last several years throughout the industry. (But, then again, if a buyer really wants related property, the right price will keep the deal whole.) Mostly, buyers need the deeper financials, to understand individual papers’ trajectories, the detail on changing revenues and costs. Buyers also say they need to understand better:
- Related pension obligations. These obligations serve as a big, if underreported, factor in newspaper value. Through multiple bankruptcies, DFM has reduced some obligations, but buyers need to assess what they’re in for.
- The impacts of centralization — and decentralization. In his four-year tenure at DFM and its Journal Register predecessor, CEO John Paton moved dramatically and publicly to convert a Big Iron newspaper company into a digital-first one. That meant rapidly cutting as many legacy costs as possible and, over time, centralizing what could be centralized. After all, Internet technology is global, and Paton applied those cost lessons firmly. The massive company — third by circulation in the U.S. — that Paton massaged together, though, is becoming undone, as we play guess-who about the buyers. So those buyers want to know how dependent individual properties may be on national process or technology. How much money will buyers have to put into any acquired papers to (re-)build ad, circulation, or content management systems?
- What happens to joint ventures, like the company’s Ad Taxi digital services business — a sales effort adopted by the company’s individual papers?
Second, buyers need a “theory.” Theory translated: Why the hell would anyone want to buy a newspaper in late 2014, given their still-plummeting financial fortunes — witnessed again this week by Tribune Publishing’s first quarterly report, noting a revenue drop-off of 5 percent in total, with ad revenues down 9.5 percent and digital ad revenues down 7.4 percent from the previous year?
So a buyer should have a theory of how to make money, starting in 2015 and through next several years, on any property bought. I debated several theories with industry leaders and watchers this week, and I think we can sum them up into three ideas:
- The Buffett Stronghold Theory of Newspapering: Look at Berkshire Hathaway Media and its purchase of smaller community papers. Smaller community papers — without strong print and usually more minimal local TV competition — are faring significantly better than their big-city cousins. That’s been true since the dawn of digital disruption, and it looks like that trend grows more pronounced each year. Smaller dailies not only enjoy less competition, but also publish more unduplicated local news and enjoy local ad relationships that Google and Facebook haven’t (yet) made major inroads into. That means higher profit margins and more predictable cash flows. Multiples range beyond the 3-4× metro papers fetch, to 5-6×. Put Halifax Media and the re-vivified GateHouse, backed by Fortress Investments, in this camp. GateHouse further brings the mojo of local digital services leader Propel Marketing to these properties, building out future-grabbing digital ad streams (“The newsonomics of selling Main Street”). This stronghold could be stronger — its moat is pretty narrow — but the theory provides a way of justifying smaller newspaper acquisitions, with the assumption that the business could be decently profitable into 2020.
- The Last Man Standing Metro Theory of Newspapering: I’ve pointed to this justification in Scripps CEO Rich Boehne’s buildout of WCPO TV in Cincinnati, where this TV newsroom may well now outnumber the daily, turbulent Cincinnati Enquirer in size. New Tribune Publishing CEO Jack Griffin serves as this theory’s high priest. In short order, Griffin closed deals to buy up print properties around Tribune’s Baltimore Sun and then its Chicago Tribune. Tribune bought out the Sun-Times’ six daily and 32 weekly suburban newspapers last week, paying a grand total of $23.5 million for them. (That’s a total that wouldn’t even buy you six houses in Silicon Valley’s high-flying Atherton, where the median home sale price is up to $4.6 million. That’s both an interesting comparison and one more symbol of the divergent fortunes of print and digital in 2014.
The big idea: Print advertising may be in permanent decline, but there’s still lots of it. If you can buy print properties cheaply enough, and then exact the tech/sales/content synergies possible, the value of a metro-area print-based enterprise will increase. It’s Dean Singleton’s once precedent-setting clustering theories for this age, and it’s as yet unproven. Griffin, like GateHouse in smaller communities, plans to add on a digital services business to these metro properties; one top priority is expanding Tribune’s 435 Digital. So put Tribune in the hunt for some DFM properties. Likeliest: The LANG properties in greater L.A., allowing the L.A. Times to execute the Baltimore/Chicago strategy there. Most prized is the Long Beach Press-Telegram, serving a population of 600,000 right next to L.A. Orange County Register owner Aaron Kushner had prized that market as well before his fall; now his archrival Times is likeliest to dominate it.
- The Billionaire Bingo Theory: God bless America’s billionaires. Three — Jeff Bezos, John Henry, and Glen Taylor — have bought up three big and important newspaper-centric operations: The Washington Post, The Boston Globe, and Minneapolis’ Star Tribune. I’ve called then the 50/50 men, understanding both the civic values of metro newspapers and the ability to turn around their business fortunes — given more time and investment. Alas, we need more of them. Mike Cassidy, one of hundreds of Mercury News alums, directly asked the question well-circulated here in the Bay Area: “Will Silicon Valley save the newspaper of Silicon Valley?” As we find out about the opening of those envelopes, we’ll see whether any local person of means (maybe Atherton-based) steps forward.
Pierre Omidyar had been everyone’s favorite choice, given his deep pockets and civic consciousness. Local, though, has been something he’s said he’s not interested in. Maybe his recent escapades with Matt Taibbi (“The Pierre Omidyar Insurgency”) will cause him to give Bay Area newspaper ownership a second look — but don’t bet on it. In fact, the Bay Area — with one of the healthiest economies in the world — may seem like the biggest orphan in this process. Hearst owns the San Francisco Chronicle, and it is likely to be neither a buyer nor a seller. That further complicates the economics of buying DFM’s Mercury News, Contra Costa Times, and smaller dailies: How much print synergy can a new owner wring out of an area leading the globe in going profoundly digital?
Digital First Media CEO John Paton is an old hand at opening envelopes. He loves the dating and mating game of publishing. Assuming no whole company bids surface, then expect the partial selling of the named clusters. Since however, some of these clusters aren’t really logical clusters (like the Pioneer Press/East group), we can figure the poking and pursuing will take lots of twists and turns. By mid-year 2015, new owners will be forced to bring new logic back to the romances of late 2014, setting their theories against real-time performance.
First Published at Nieman Journalism Lab
Follow Newsonomics on Twitter @kdoctor
FROM THE ARCHIVES