The Return of the Deal   

A couple of newspaper acquisitions break the drought.

By definition almost everything slows down in a recession, and that has been notably true when it comes to buying and selling newspapers.

In the last recession, which for newspapers covered 1990 and 1991, newspaper acquisitions disappeared after several years of frenzied dealing. In the current recession, which may or may not have ended, depending on how you read the tea leaves, newspaper deals likewise dried up.

Until, that is, February of this year, when Lee Enterprises agreed to acquire Howard Publications for $694 million, and Community Newspaper Holdings Inc. agreed to buy four dailies from the Ottaway Newspapers unit of Dow Jones for $182 million.

Now, for someone like me who spends a lot of time appraising newspaper properties, this break in the acquisition doldrums was welcome. One of the ways to appraise a newspaper is to compare its operations with those of papers recently sold. When there aren't any deals, a valuable appraisal tool is lacking.

Actually, there were a few changes in ownership last year, affecting 23 dailies, but all were tiny in circulation and none of the financial data was revealed. Compare that with 125 newspaper sales in 2000 and 70 in 1999, with many sizable dailies involved.

The fact that deals dry up in a recession does not mean that newspapers suddenly are no longer valuable and desired by prospective purchasers. The problem is that prospective sellers have a pretty good idea of how much money they want, an amount usually expressed as a multiple of operating cash flow, which is earnings before noncash charges like depreciation, interest and taxes. The going price for newspaper acquisitions has been a multiple of around 12 times operating cash flow. If earnings drop 15 to 20 percent in a recession, which is not unusual, the impact on how much an owner would get is large indeed, and it's no wonder prospective sellers would rather wait until business picks up.

What was notable about Lee Enterprises' announcement of its acquisition of Howard Publications, which owns 16 dailies in 11 states, was that it provided both pre-recession and recession multiples. Based on Howard's fiscal year ended April 2000, the sale price was 12.3 times operating cash flow. Based on the following fiscal year, which included several months of recession, the multiple was 14.1. (Dow Jones made no such distinctions in its announcement that it was selling four of its Ottaway newspapers in four states. By my calculations, the $182 million sale price represented 12.2 times 2001 operating cash flow.)

If the past is a guide, these two acquisitions presage a resumption of ownership concentration, a process that began back in the 1950s and probably will not end until a handful of companies own most of the nation's dailies.

Still, the newspaper industry remains diverse in ownership compared with other media operations. By my count, there are 118 companies that own two or more dailies (many of these companies are quite small, with total circulations in the tens of thousands) and somewhere less than 300 individually owned dailies.

The question that hovers over newspapers is whether the rush to media convergence will push the industry into an entirely different ownership environment. So far, newspaper companies have been acquired by other newspaper companies, and convergence generally has been intracompany, involving TV and radio stations and in some cases cable operations already owned by the companies.

But consider AOL Time Warner – which owns magazines, TV stations, motion-picture production, cable television systems and Internet services, and which may soon, based on a recent federal appeals court decision, be allowed to own TV stations and cable systems in the same market. It takes no leap of imagination to know what would complete this convergence picture--newspapers. Or consider General Electric, which owns NBC. If this corporate behemoth--which dwarfs all other media companies--decides to stay in the media business and decides convergence is the path to success, it has the financial means to buy up just about everything, including newspapers.

I confess that I sometimes lie awake at night and envision a future in which every movie producer, theater operator, television network, TV and radio station, cable system and, yes, every newspaper is owned by a company I'll call Media One--Media Two just having gone belly-up. It would all have been done in the name of economic efficiency and inevitability of consolidation, and it would be horrible. For now, at least, the newspaper industry is fortunate to be out of this convergence fray and to have almost all publications owned by people who basically (if not always perfectly) understand what newspapers are supposed to stand for.