A Bad Time To Be Hawking a Newspaper   

Tight money and less ad revenue make for a bear market.

Timing is everything, as someone once said, and the best time to sell a newspaper was three or four years ago.

Back then, sellers of newspaper properties were benefiting from favorable trends and commanding high prices. Now, the trends are not so favorable. Advertising has been weak for more than three years, and analysts say newspapers may not regain the high profitability – and high values – of the 1980s.

Perhaps the most important factor driving the high values of the past was psychological. Media investments had become the rage on Wall Street and elsewhere, and there was intense competition to buy up newspapers, television stations, cable systems and magazines at inflated prices.

Economic laws were at work as well. The number of available newspapers and other media properties was shrinking at a time when large companies, flush with investment capital, were chasing after acquisitions, creating a classic imbalance between supply and demand.

Moreover, newspapers were still benefiting from the widespread perception that they were reliable money machines due to their ability to hike advertising rates because of local dominance.

Since then, newspapers and other media companies have been beset by the worst advertising recession since World War II, and it is not clear that newspapers will be able to recoup all that was lost. That and tight money have created a big gap between what sellers expect to get and what buyers are willing to pay. It is hard to be precise, because there have been so few sales in the past few years, but it appears newspaper values may have dropped 25 percent to 30 percent from the levels of just a few years ago.

For perspective, it is important to note that some newspapers have always been worth more than others. The overriding consideration in determining the value of any newspaper is its level of competition. A newspaper that has no significant competition in a weak market likely will be more valuable than a newspaper in a growing market with lots of competition.

A newspaper in a small- to medium-sized market tends to be worth more on a relative basis than a big-city paper. Big cities tend to have more media outlets competing for advertising, and big-city newspapers are more likely to have onerous union contracts.

The term "on a relative basis" likewise bears explaining. One way to compare the values of newspapers is to apply multiples to various factors, most commonly revenue, circulation and operating cash flow (what is left over from revenue after cash operating bills are paid and before anything is set aside for debt interest, non-cash charges such as depreciation, and taxes).

Hypothetically, a newspaper with $30 million in annual revenue, 75,000 circulation and $8 million in cash flow might sell for $90 million, a price that is three times revenue, $1,200 per subscriber and more than 11 times cash flow. Another newspaper, with $60 million in revenue, 150,000 circulation and $12 million in cash flow might sell for $120 million, a price two times revenue, $800 per subscriber and 10 times cash flow.

The larger paper sold for more money, but the smaller paper, on a relative basis, is more valuable dollar for dollar. What has happened over the last three or four years is that the multiples acquiring companies are willing to pay have slipped.

How does a buyer decide what multiples to offer? In fact, multiples are just a way of comparing acquisitions and actually are the result of a complex valuation calculation.

The buyer's calculation involves some form of cash-flow projection. The newspaper's financial data are analyzed to ascertain where it is appropriate to remove extraordinary costs and gains that a new owner would not experience.

The buyer then determines whether there are excess employees by his standards and whether the newspaper has been unusually passive in setting advertising rates and creating new advertising vehicles to generate more revenues. After assessing the prospects of the market and balancing estimated revenues with costs, the buyer projects a cash-flow statement several years into the future.

The price a buyer is willing to pay then depends on how long the buyer is willing to wait for the acquired newspaper to contribute to his cash flow – in other words, the point at which the acquired newspaper's cash flow under new management exceeds the costs (interest and principal payments) of the acquisition price.

In the high-flying 1980s, some newspaper buyers were willing to wait five or six years to achieve positive cash flow. Today, two or three years would be a stretch, and some buyers will not wait more than one, particularly in view of the uncertainty about whether newspapers will recapture their share of retail advertising lost during the recession. This uncertainty, more than anything else, is why many newspaper owners probably wish they had sold in better times. l