The Great Devaluation of the American Daily Newspaper
James Dolan surprised many casual observers of the flailing newspaper trade when he suggested he might bid on the for-sale New York Daily News—and offer a dollar. But the dollar is a good proxy for the familiar question mark, as in who the hell knows what a newspaper property is worth these days.
While Jeff Bezos paid $250 million for The Washington Post, John Henry paid only $70 million for The Boston Globe. Down the coast, the once-dominant Tampa Tribune went begging—Warren Buffett rejected it outright when he bought the rest of the Media General papers in 2012—until a private buyer agreed to pay a paltry $9.5 million, less than a Tampa Bay mansion would go for. In hypercompetitive New York City, a money-losing daily isn’t worth a lot.
We revisit this matter of value, and valuation, as this quarter’s two most prominent deals make news. Tribune Publishing’s agreed-to, but not yet closed purchase of UT San Diego offers case A (“Newsonomics: Tribune Publishing Wraps Its Arms Around San Diego — and All of Southern California”). Digital First Media’s public break in acquisition talks with Apollo Global Capital (Capital: “Apollo withdraws from D.F.M. deal, Paton leaves”) presents Case B.
In both cases, valuation has been a make-or-break issue. Valuation, of course, is always central to any deal, but today valuation finds itself more clouded by the ever-downward-spiral of print advertising, which still makes about a half of most newspapers’ revenues.
First published at Capital New York
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Valuation should be simple. Brokers, buyers and sellers will tell you that a multiple of three-and-a-half to five times annual EBITDA (earnings before interest, taxes, depreciation and amortization) represents today’s benchmark.
Let’s consider how the industry dropped to that 3.5-5X, with that highest number most likely for smaller, less-competitive properties.
The San Diego Union-Tribune presents a stunning example. For a couple of decades, the country’s biggest newspaper chains salivated at the prospect of owning the monopoly daily in affluent and growing San Diego. The Copley family ran a highly profitable operation, after buying both the morning Union and the evening Tribune (merged in 1992) in 1928.
Gannett head Al Neuharth paid frequent visits, wanting to be first in line if the family wanted to cash out. Knight Ridder’s Tony Ridder paid his respects, in much the same way he did with the Lesher family, who owned the prosperous Contra Costa Times. Ridder closed the C.C. Times deal in 1995 for $360 million, but the Copleys just wouldn’t sell their paper that then sold 400,000 papers daily, a circulation now cut by more than half.
At the height of the market, in the early aughts, selling the San Diego Union-Tribune, and associated properties, would have paid the family a bounty in the neighborhood of a billion dollars. That’s the valuation that Owen Van Essen, one of the newspaper’s top brokers, places on the top-of-its game UT. That’s a multiple that would have come in at 12 to 14 times earnings. So, we can see that the money-making machine then produced about $80 million a year in earnings.
Then, digital disruption started eating away at the enterprise, and the Great Recession forever changed newspapering. Back in 2008, the Tribune/L.A. Times found itself within days of buying the U-T, according to one knowledgeable confidential source. The approximate price: $22 million. That fact has never made it to print, but looks newly relevant.
The 2008 deal fell apart, in part, over the buyer’s concerns about who would assume liability for the clean-up of a paper mill site partially owned by the UT. Within days after negotiations broke up, the Sam Zell-led Tribune company declared bankruptcy.
That deal, like the current Tribune one, would not have included its valuable real estate. UT property that Doug Manchester will still retain after the current sale closes is now valued at about $43 million.
Finally, after family death and dysfunction, the Copleys did finalize their fire sale, selling to Platinum Equity for somewhere between $35-50 million. In less than a decade, the billion-dollar property had lost 95 percent of its value.
Then, San Diego developer Doug Manchester enabled Platinum to double or triple its investment, paying $110 million in 2011. As Manchester won some national derision for crossing church–state lines (read more in this David Carr column), the Tribune company endured four years of bankruptcy torture that finally resolved and resulted in a corporate split.
The new TPub—split off from Tribune’s broadcast assets—finally emerged last August.
Now, we see a replay of the 2008 almost-Tribune/L.A. Times purchase of the U-T. It’s at a price four times what the Tribune would have paid then.
How we make sense of all these prices?
The first Copley sale faced a fierce buyer’s market. Remember how tight money was in the recession’s cauldron; the Copley family needed to cash out and finally found a bargain-basement offer in Platinum’s.
Then, things began to get normal again at the paper. In the newspaper industry, we’d have to put quotes around normal, as in the already tiresome phrase, “the new normal.” Manchester made money on his deal, when he adds the value of his retained real estate to the cash and stock he is getting from Tribune, plus, of course, the annual profits the U-T pulls in.
Tribune Publishing now contemplates paying a multiple of 4-plus for U-T. Its EBITDA now runs at $20-24 million annually, confidential sources have recently told me. At the high end of a 4.5X multiple, that’s a market value of as much as $108 million. Tribune agreed to pay $85 million (with $12 million of that in TPub shares), docking the standard multiple, largely because of growing pension obligations.
That $20-24 million in U-T EBIDTA allows TPub C.E.O. Jack Griffin to tell investors that the buy will be accretive; that it will improve TPub’s overall EBITDA. For 2015, the company has said that it expected a total of $160 million to $170 million in adjusted EBITDA. The U-T buy, then, could be a good contributor, especially as the Tribune struggles to make its numbers.
Just a couple of years ago, U-T’s EBITDA reached about $27 million, so we can see difficulty of forecasting in this industry. Certainly, San Diego’s top line is being hit by lost ad revenue. The question will be how much the consolidation efficiencies—as the operation is managed by Publisher Austin Beutner jointly with the L.A. Times, under the umbrella of the California News Partnership—will help preserve EBITDA.
The break-up of the DFM/Apollo deal reflects similar shifting sands. At about $400 million, the would-be March deal (“What are they thinking? Apollo’s acquisition of Digital First Media”) amounted to an about 3.75 multiple. Why would that number be below the 4X? Even D.F.M. C.O.O. Steve Rossi has acknowledged that the company’s make-up is less than ideal, telling me last week, “We have a lot of cats and dogs,” large papers and tiny ones, East Coasts, West Coasts and lots in between, some throwing off 25 percent margins, other considerably less.
Even that 3.75 multiple got harder for Apollo to settle on in final talks. After all, the newspaper industry will lose another five percent and more of its ad revenue this year. Overall revenue will be down. Further, D.F.M.’s strategy to match up cost-cutting to print ad loss doesn’t seem sustainable, especially since Apollo had determined that the company needs significant investment to catch up on its digital potential.
As part of the long sales process, D.F.M. and its banker, UBS, had parceled out financials, acting to lure in would-be buyers, as it increasingly disclosed more information. The precariousness of those numbers, and the company’s squeamishness about them, became evident even as the process wended toward finalization, providing just one more reason to hit the pause, if not the stop, button.
$80 million in annual earnings gets quartered, in San Diego and more widely, with still little stability in sight. The multiple—cut by two-thirds—tells us how no one yet sees a growth scenario for newspaper properties. That four multiple? That tells us perhaps-savvy buyers think they can get even on their newspaper buyers in about four years, managing the various declines.
In the end, we can recognize this long road of valuation for what it really is: devaluation. There’s little way to measure newspapers’ valuable contribution to their communities and their citizens. Their financial value decline, though, is easy to mark.