They Still Are Buying Newspapers (Companies, That It Is)

Philip Stone January 8, 2009

These are dark days to be making newspaper deals, but they are still getting done, albeit in the small to mid-size markets. A buyer has come forward for the two newspapers in Connecticut that the Journal-Register Company had threatened to close down, and in Maine the Blethen family has a deal for their three dailies, but had to extend the deadline while the buyers continued to try and come up with the financing. No one said that even at very low prices it was going to be easy.

But those deals at least show there are buyers out there, although it is probably fair to say they are paying rock-bottom prices (in these particular deals one gets the “terms not announced” statement which usually means fire sale or something close to it) and their prime objectives  may not be so much financial as they are strategic, and even for community reasons.

It’s a sorry tale In the case of the Maine newspapers, including the state’s largest – the Portland Press Herald. They were bought in 1998 by Seattle’s Blethen family for a borrowed $230 million (the family originated from Maine a few generations back so there were family reasons to get into the Maine newspaper business – a real lesson that old family ties and business don’t necessarily mix very well.) Trying to meet the debt of that loan is strangling the Blethen’s main business – their 50.5% ownership of the Seattle Times (McClatchy has the rest). 

And in a sign of how newspaper values have really tanked in just the past few months, it was last August that we wrote, “Everyone understands that the Seattle owners are going to receive much less than the $230 million they paid, the big question is how much less? The thinking is that the newspapers will go for well under half the last sale price. Newspaper broker Larry Grimes believes the sale price will probably be around 8-9 times annual operating cash flow (EBIDTA -- Earnings Before Interest, Taxes, Depreciation and Amortization).” 

Well, here we are just five months later and the talk in Maine is that the agreed deal is probably valued at just the value of the property the Maine newspapers own –close to around $30 million.

And newspaper broker Grimes, president of W.B. Grimes based in Maryland, now thinks the selling price is more like 6 to 7 times cash flow – but just how much cash flow is there these days? Even the lower formula seems to be too high for banks these days in financing newspaper deals and perhaps that explains why the Maine investment group couldn’t meet their end-of-2008 deadline to come up with the cash forcing the Blethen extension. Grimes told ftm in an email exchange Wednesday, “Many banks are only willing to lend at 3-4 times cash flow. So if a buyer needs to do a deal at 7 times cash flow they have to come up with 50%, sometimes more, down. Which is ridiculous.”

The Maine buyers are a pedigree lot including former Defense Secretary William Cohen and John Baldacci, brother of the current Maine governor, so it’s not that these people are short a penny or two, but obviously they want to use other people’s money as much as possible rather than their own when getting into the newspaper game. Which in this day and age probably makes very good economic sense.

In Connecticut, meanwhile, a buyer has been found for the Bristol Press and The Herald of New Britain. Terms were not announced (fire sale). The two newspapers had become a cause célèbre when the Journal-Register company announced in November that either the newspapers get sold by January or they get closed down. What caused a lot of buzz was that senior politicians from both political parties made loud noises about trying to do something to help including tax breaks and the like. That caused some discomfort for newspaper purists concerned how their role of watching and criticizing politicians could survive politicians getting their fingers involved in saving newspapers.

The truth is, of course, that the newspaper industry is like many of other industries in the U.S. – it is hurting very badly and if the government is going to give out money to other entities then why not the media, too, if they are really about to go out of business. When we first suggested that idea about three months ago the purists pooh-poohed it for all the obvious state-newspaper separation reasons, but it has been interesting to note in those ensuing months how many more analysts are making similar noises about government aid, while at the same time listing all the traditional reasons why not. It probably won’t happen for all those ethical reasons, but as a last resort?

Do you, for instance let a Lee Enterprises or a Journal Register go under? Not important enough? Then how about McClatchy (shares hit 62 cents in December); how about The New York Times which is trying to dump its Boston Red Sox holdings,  has arranged a sale-leaseback of its headquarters building that would raise $225 million as it figures out how to deal with a $400 million debt payment this year and things are getting really tight.  One assumes Tribune comes out of Chapter 11 a far healthier company, but if not?

For obvious ethical reasons government bailouts are the last thing newspaper executives will consider. But if there is no alternative? The two prevailing views are that government today helps to prevent big job losses  (are journalists as important as auto workers?)  The opposite view is that there should be survival of the fittest and the weak must die, but they didn’t do that for the auto industry. So far the banks and the auto industry have gotten help, steel is standing in line, so why not newspapers about to fail – if not cash handouts then tax breaks or similar? Where does that line get drawn?

Newspaper broker Grimes has always pointed out it is a different buying and selling world for the smaller newspapers than for the large metropolitans. He says there is still activity in the small markets but in the larger markets not much is happening.

“San Diego is a prime example  of the acquisition paralysis that has gripped the larger newspaper companies in the past 18 months,” he said. “Some don’t have the financial wherewithal to make a deal right now; others can’t decide whether they want to be on-line or print publishers and without any of the big boys looking at San Diego it does not leave many other potential buyers. There are a couple of private equity backed groups running around looking at papers right now, but their backers seem very slow to pull the trigger on anything.”

Grimes points out that private equity has never been an overriding player in the newspaper industry because most deals make sense for strategic rather than financial reasons. The perception now is that the banks are not loaning money so most newspaper buyers are remaining on the sidelines.

“Our intelligence is telling us that weekly and the smaller and mid-size daily publishers are still quite interested in expanding via acquisition. They still fully buy into the value of developing newspaper clusters. But they are waiting for the banks to relax their lending terms.”

As are we all!