Mid and Small Newspaper Industry is Not Failing

Our mission is to unite and educate our members for their strength and prosperity.

Written by John Cribb, Cribb, Green & Associates

Our industry is going to survive, and is doing much better than many other industries in the current recession.

We've spoken to dozens of owners and executives of mid and small newspapers/shoppers and though many are struggling with the current economy, they are getting by. Most say revenues are down 10%-15%, and are making expense cuts to compensate. EBITDA margins can still be in the 15%-25% range, although 5%-15% is closer to the norm. The industry may not have hit the bottom in revenue decline, but it appears it may be getting close. Certainly, these are ugly numbers compared to what newspapers are used to, but they are not disastrous.

This is not the financial condition of an industry that is failing. Auto and real estate businesses can be down 40% or more, and many retailers are down 25% - far worse than newspapers. Mid and small newspapers are holding up well considering the intensity of this recession.

Conventional wisdom that the newspaper industry has failed is just plain wrong. Consumers want local news and information more than ever, and need this information to be gathered by credible professionals. The newspaper industry has the only real newsgathering force in any market, and the information they create is highly sought. What has changed is the financial model that newspapers have used to be paid for their product -- but a new model will emerge. There is too much demand for quality local information for it not to.

The idea that "ink on paper" will disappear is wrong as well. Ink on paper is too convenient to ever go away, however the ink on paper portion of the media will continue to be a smaller piece of a bigger media pie. Newspapers will continue to expand the digital distribution of news and information, and will also provide printed products.

The incorrect notion that all newspapers are in the tank creates a huge opportunity for people and companies that believe the industry will not only survive, but will continue as a robust business after this economic turmoil settles. There are undoubtedly tremendous bargains in publicly traded newspaper stocks right now, but the biggest opportunities are in the acquisition of mid and small market newspapers by experienced newspaper operators. The EBITDA multiples used to value newspapers are at historic lows of 4x to 8x, and these multiples are applied to trailing twelve-month profits, which are low due to the stalled economy. The result is the lowest newspaper valuation range tracked in Cribb, Greene's 86-year history.

How do bold newspaper operators with confidence in the industry capitalize on the opportunity to buy at these low levels? Banks consider newspaper loans as toxic (interesting because many newspaper companies have better balance sheets than their lenders). Our guess is that availability of traditional bank financing for newspapers will trail the national economic recovery by many months, and likely never return to the relatively easy credit of the past. Venture capital has also mostly fled the newspaper space, although vencap money may return to the newspaper industry more quickly than banks. The current lack of funding means most acquisition structures will fall into two categories: seller-financed sales and joint ventures.

Seller financing has always been common in very small newspaper transactions and will appear in larger and larger deals as time goes on. The typical seller financed sale is structured with a cash down payment of 20%-30% of the purchase price with the balance paid over 5-10 years including interest of 5%-7% per annum. The security the seller has in the loan is the newspaper business that was conveyed. This type of deal structure has drawbacks for the seller (primarily the risk of a buyer default on the loan) and advantages that include receiving a higher interest rate than can typically be achieved elsewhere.

Joint ventures are also on the rise, and can take the form of partnerships or management/operating agreements. A buyer may provide funds, or a neighboring publication, or operating management, as his contribution to the partnership and there is usually a buy-out agreement that can be triggered in the future. Management/operating agreements may have a buyer who takes the day-to-day management of the publication in return for a percentage of the company and the opportunity to purchase the balance at some point.

The newspaper operators who aggressively pursue a disciplined acquisition model have the opportunity to create significant value in the next few years. Newspaper buyers have had to pay 10x, 12x, and 14x EBITDA to make acquisitions in the past, and these high multiples take years to provide a return. At 4x, 6x, and 8x EBITDA, buyers can purchase more properties and grow their newspaper companies far more quickly. The creation of wealth for some publishers will be tremendous.

The bargains on newspapers, as with all market conditions, will end eventually. The window of opportunity to buy newspapers at the bottom will close. Recovery from the recession will improve both attitudes and advertising revenues, which will drive newspaper values up. Profitable economic models for newspapers will evolve for digital information distribution, and ink on paper editions will continue to have value. But more important will be the general population returning to their senses, as it becomes clear that newspapers will continue to provide essential and exclusive content to consumers.