In the not so distant past, the more valuable newspapers became, the more eager
sellers and buyers became to do deals. Today newspapers are far less valuable —
by half or more — yet sellers and buyers are once again finding each other in great
When the future of newspapers seemed bright, with apparently never-ending
cash flow growth and steadily increasing values ahead of them, acquiring the print
products seemed like a no-brainer. Banks bought into this scenario, and acquisition
money was easy to borrow.
Then came the Internet. When broadband coverage of households began to surge in
2004, advertising began to drift away from newspapers. In just four years, starting
in 2006, the newspaper industry's advertising revenue dropped more than 50
percent, and is still eroding, although the rate of decline has slowed thanks to easy
The drying up of the revenue stream that historically contributed three-quarters of
newspapers' revenue (it's down to about 60 percent now) had a grievous impact on
operating profit margins, dropping them from over 20 percent in the early- to mid-
2000s to around 10 percent today. (Those figures are based on data from publicly
reporting companies as a proxy for the industry.) Not surprisingly, banks are no
longer so eager to finance newspaper purchases.
So where is the money coming from to fund the current wave of acquisitions? And
what do the buyers see that banks apparently do not? Well, it is worth pointing out
that, at the right acquisition price, a 10 percent operating profit margin, or even a
couple of points lower, is not unattractive. Some industries don't hope to achieve 8
to 10 percent margins in the best of times, and here are newspapers reaping them in
what for them has been the worst of times.
Back when newspaper margins were soaring, acquisition prices were also high as
measured by multiples of revenue or cash profit (so-called EBITDA, or earnings
before interest, tax, depreciation and amortization) or average daily circulation unit.
For example, a newspaper's sales price back then might be equal to one-and-a-half
to two times its annual revenue (or 13 to 15 times its annual cash profit), or $1,000
to $1,500 per unit of average daily circulation — a week's total circulation divided
by publishing days. These were typical ranges of the multiples back then, although
some individual sales could be higher or lower.
Now that most newspaper profits are down by half or more, it is understandable
that their valuations are likewise down, as are the multiples of revenue, cash
profit and circulation when they are sold. The New York Times Co. recently sold
its Regional Media Group of 14 relatively small dailies and two weeklies for $143
million, which is just over half the group's annual revenue and $368 per average
daily circulation unit.
So who's buying and who's putting up the money? The Times' papers were acquired
by Halifax Media Holdings, a company formed in 2010 by Stephens Media Partners
and two private equity companies to acquire the Daytona Beach News-Journal.
Stephens Capital Partners is part of Stephens Inc., a large financial firm based in
Little Rock that was one of the early non-newspaper investors in the newspaper
business, having taken over the old Donrey newspaper chain in 1993. Many of the
recent newspaper acquisitions — the San Diego Union-Tribune, the Chicago Sun-
Times, Minneapolis' Star Tribune, among others — involved private
Late last year, Warren Buffett's Berkshire Hathaway bought the Omaha World-
Herald Co., which, in addition to its namesake paper, included six small dailies in
Nebraska and Iowa. The price was $150 million, plus the assumption of $50 million
in debt. This despite the legendary investor's earlier assertion that newspapers
were not attractive investments in the digital era and that he wouldn't buy most of
them "at any price." Indeed, the Omaha deal was a bit of an outlier among current
transactions, since the price amounted to slightly over $1,000 per daily circulation
unit and, in Buffett's words, "certainly is not a bargain." But, he noted, the World-
Herald is solidly profitable. And, of course, it is Buffett's
What worries me about some of the recent acquisitions (not Buffett's) is that if
newspapers fail to hold their own and their margins continue to decline, these
nontraditional owners could start slashing costs in a misguided attempt to make
their investments pay off. That's a truly bad idea. The principal reason the new
owners bought the papers is the lingering value of their strong newsgathering
franchises, still the most dominant in every market despite rampant layoffs and
downsizing, and still the most crucial asset when it comes to seeking customers
online and on mobile devices.
Lose that and there's nothing left.