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December 22, 2014

The Newsonomics of Near-Term Numerology

First published at Nieman Journalism Lab

Think about this. The Tampa Tribune, a paper that would have been worth hundreds of millions of dollars a decade ago, sold this week for $9 million.

Its seller, Media General completed the disposal of its newspaper properties, a movement that’s been celebrated by investors, with MEG moving up about 18 percent in the past month, quadrupling the S&P 500 performance for that period.

Why?

The easy answer would be that MEG is now a broadcast company. But wait — other newspaper-dominant stocks are way up, too. You can buy whole newspapers for the cost of mansions, and yet newspaper shares are going up.

Metro newspaper publishers tell you that next year will be still another down year for advertising, Yet some of those who peer into the future, estimating ad spend for the next several years, say they expect it to finally flatten out.

Numbers, numbers, numbers. Many are in motion, as the varying moves of Advance print reductions, Warren Buffett’s warm community print embrace, Doug Montgomery’s blast-from-the-past San Diego moves, Aaron Kushner’s print-is-king Orange County Register foray, and adoptions of paywalls and marketing services as new revenue streams sweep across the country.

Let’s try to make a little sense of this cavalcade of numbers and see what they tell us about 2013, as we do a little news numerology.

Revenues

Let’s look at revenues first. Look at the advertising forecasts of everyone from Borrell Associates to eMarketer and find a surprise: Basically, they’re flattening.

Follow the long squiggle downward of print advertising through 2012 — 18% decline in 2008, 28% decline in 2009, 8% decline in 2010 and 9% in 2011 — and then flat to more mildly downward. Why? Gordon Borrell, the long-time tracker of the digital disruption of the press, says the main reason is that things are looking up at smaller papers.

“Our surveys of newspaper advertisers are indicating that they’re either going to keep their print advertising levels the same, or increase it, in 2013. It happened all of a sudden, and we’re launching a re-testing of this in late October to make sure they’re saying the same thing.”

This upward trend is mainly at smaller papers. “There are a lot of 10,000-circulation dailies out there,” says Borrell. “And about 5x to 7x as many weeklies out there.”

As I’ve spoken at various state newspaper associations and similar gatherings of newspaper people, that rings true. The weekly press is having no picnic, but it continues to find robust advertising because it continues to enjoys good, fairly stable readership. Larger weeklies and smaller dailies are extending their offerings — marketing services, again — as they test mobile offers, social marketing, SEO aid, and site building.

It’s the metro publishers who can’t seem to catch a break. As they complete 2013 budgeting, they’re looking at yet another down year in advertising, just like every year since 2006. They are budgeting down in mid-single digits.

Borrell takes a long view of media change, to offer one more possible reason for the flattening. “There is an exact parallel with what happened to radio advertising in the 1960s, and we’re modeling the ‘flat’ idea on that. Radio ad sales plummeted in the 1950s due to the new medium of TV. Then in 1962, it flattened out and remained a consistent 7 percent share of advertising ever since.”

eMarketer projects a loss in total advertising of 14.7 percent over five years, and yes, given the industry’s immediate history, I’d call that flattish.

Share prices

I’m dubious about that flattening proposition — each new technological and economic disruption just seems to accelerate the movement of ad dollars — but those are the numbers out there. And maybe it’s those forecasts that are helping boost newspaper company share prices.

Year over year, consider these newspaper share increases:

  • Gannett, which announces its third-quarter earnings Monday: up 64 percent
  • New York Times Co.: up 49 percent
  • Lee, which announced it’s ahead of its debt-reduction plans: up 107 percent
  • McClatchy: up 63 percent
  • Scripps: up 60 percent

What else, in addition to those revenue forecasts, might be driving that upward movement? Check the opinions of the remaining newspaper industry financial analysts and they’ve been moving to “outperform,” “buy,” and “overweight,” up from “hold,” “neutral,” and “sell.”

What’s driving the analysts? Having listened in on a few quarterly earnings call, my overall sense is that they believe newspaper company CEOs have learned to manage decline and still show a modest profit. They’ve seen that companies have been able to cut and cut and still maintain profitability. Further, the rise of digital circulation has begun, among those who’ve executed paywalls well, to make up for advertising decline (“The Newsonomics of Pricing 201“)

Financial analysts worry about preprint loss in the next couple of years, but not too much. In a sense, analysts, and apparently newspaper company investors, have adjusted themselves to the overused “new normal,” a phrase business people like to use to describe everyone’s inability to explain what indeed is really happening in this era of massive economic change.

Sales prices

In this new normal, it looks like, despite the odds, newspaper companies have survived the big storms and can piece together a future. I’d like to be first in line to believe that, but it’s a tough argument to stand on — and to bet on with money. Consequently, it makes more sense to look at what newspaper propertiesthemselves are worth, rather than what stock investors have talked themselves into believing they are worth. Take a sample of recent sales, in addition to this week’s Tampa sale:

  • Philadelphia Inquirer and Daily News: From $515 million in 2006 to $139 million in 2010 to $55 million earlier this year.
  • Media General: Berkshire Hathaway Media picks up 63 titles, or about 21 actual “newspaper” properties, for $142 million.
  • New York Times Regional Group: Halifax Media buys 16 regional newspapers for $143 million

Quite literally, significant newspaper nameplates (and, more significantly, the real estate those nameplates rest uneasily on) are going for the prices of mansions in many communities. So why buy?

Sometimes, it’s simple: You get a great deal.

That’s what Warren Buffett got in his purchase of Media General’s papers, along with a grabbag of financial goodies (“Berkshire Hathaway Media Group: Financial Engineering Makes the Deal“), as a few analysts warn investors not to follow Warren into newspapering.

That’s what Revolution Capital Group got in its purchase of the Tampa Tribune. It’s notable that Revolution Capital managing partner Robert Loring was a principal at Platinum Equity. Platinum Equity is one private equity firm that pulled off exactly the kind of deal equity is supposed to pull off. It bought the San Diego Union-Tribune for a song, about $35 million, spruced it up, and took inabout $110 million from Papa Doug Manchester, who has practically become Prince of San Diego with his acquisition. Tripling your money in less than three years is what private equity is structured to do, despite Revolution’s protestations that it’s in Tampa for “the long haul.”

Newspapers that are selling are going for about four times forward-looking EBITDA. Basically, look at how much annual operating profit you think a company will make over the next couple of years, and multiply that by four. Run the meager prices of the deals we’ve seen and you can see that there’s little expectation of significant profit — and thus a low price.

For weeklies and smaller dailies, there’s still a tepid market, given that those papers are less affected by the game of digital takeaway. For metros, it’s another story.

Let’s look forward. Tribune newspapers may soon be formally on the market, as the FCC provides approval of the company’s broadcast licenses to post-Zell bankruptcy owners. Tribune’s properties are mainly in big-city markets, stuck in the center of the storm. The new owners would like to get out of the business — one of them, Angelo Gordon, forced this year’s sale of the Philly paper at a loss — but when they look at Tampa’s sale, it reminds them of how stuck they may be. Soon we’ll see that drama (well described by the Tribune’s Robert Channick) play out.

So pick the numbers you like. Clearly, in newspaper numerology, we can convince ourselves of many a proposition. My own non-licensed advice: Believe in the news business, and help build its future — but invest your 401k elsewhere.

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