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Newspapers to see more deals, but at lower prices PDF Print E-mail
Tuesday, 13 May 2008


REUTERS, New York - The fight to buy Tribune Co's Newsday surprised many in the media world -- not because of its high-profile combatants, but because of the price they were willing to pay to buy a newspaper.

The bidding war, ended by Cablevision Systems Corp with a deal to buy Newsday for $650 million, is not indicative of where the newspaper industry is headed.

Newspapers, struggling to stay afloat as people and advertisers flee print editions for the Internet, will see more acquisitions -- but these deals will be driven by strategic needs, with buyers offering lower and lower prices.

"It's a heck of a lot better time to buy a newspaper than it was five years ago, even if you pay more than it's worth," said John Morton, an independent newspaper analyst.

Newspapers, which about two years ago could be sold at 10 to 12 times their cash flow, could be sold at about 6.5 to 7 times today, said a media banker who declined to be identified.

"Aside from weakness in the credit markets, the valuations represent the uncertainties associated with the business model of newspapers," the banker said.

Another media banker said the industry's weakness will lead to more strategic acquisitions, but bidding wars are unlikely.

"There is too much capacity and there is too much cost in that capacity," he said. "You will see more strategic consolidation, but you won't see the prices."

So far this year, U.S. newspaper publishing mergers and acquisitions volume is $1.36 billion, well below $22.72 billion in the same period last year, according to data provided by Dealogic.

But stripping out bid prices for Tribune Co itself in 2007, deal activity in newspapers actually rose from $727 million last year, according to Dealogic, as newspapers have been trying to consolidate amid a huge decline in revenue.

Much of the decline comes from the double blow for advertising sales, particularly classifieds, brought on by the Internet and the possibility of a U.S. economic recession, and by papers losing readers to the digital space.

Newsday, the daily paper of Long Island, has a future that is no less murky than the others. But in an environment where few expected any enthusiasm for the purchase of a newspaper, Cablevision is buying a 97 percent stake for $650 million.

The offer topped $580 million bids made by News Corp Chief Executive Rupert Murdoch and tabloid rival Mortimer Zuckerman, the New York Daily News owner.

But the motives for a bidding war were unique to Newsday and the bidders in this case.

Murdoch and Zuckerman wanted a way for advertisers to reach affluent Long Islanders and each wanted to combine New York newspaper operations with Newsday to cut costs. For Murdoch, it would have helped his money-losing New York Post turn a profit and could potentially have killed the rival Daily News.

BAD TIME TO OWN

Anyone willing to take on ownership of a newspaper these days is gambling on the hope that ad declines and poor economic conditions -- not to mention easy access to debt -- will ease sometime soon.

Those who have taken the plunge have found that avoiding default has become their priority. Key examples include Sam Zell, who took Tribune private, and Brian Tierney, who bought the Philadelphia Inquirer and Daily News from McClatchy Co, which had just purchased them as part of its Knight Ridder acquisition.

Now on the block are Landmark Communications Inc's Virginian Pilot and Roanoke Times, the Chicago Sun-Times and, potentially, the entire Journal Register Co.

Small local papers may appeal to investor groups because they still tend to corner advertising markets in their communities, but metropolitan newspapers such as New York Times Co's Boston Globe suffer because of intense competition from the Internet and local television stations.

EMPLOYEE-OWNED?

One other possibility is to turn papers into employee-owned companies, sometimes in concert with local investors comfortable with the idea that they may never make the 20th century newspaper profit margins of 18 percent to 30 percent.

Christopher Mackin, president of Ownership Associates in Cambridge, Massachusetts, is working on such a proposal with the union at the Portland Press-Herald and several other Maine newspapers being sold by the Blethen family.

"I've been helping the union in that case sit down with possible investment groups and see if they would be comfortable with a 'mini-Sam Zell' structure," said Mackin.

Mackin had advised the union at Dow Jones & Co on alternatives to being sold to News Corp. He also worked on proposals for employees to buy several Knight Ridder papers rather than having them sold to McClatchy.

One key point that could stir investor interest: an employee-owned company may be able to take advantage of laws that make it exempt from most federal taxes.
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