Valentine’s Day may be coming early for Digital First Media this week. DFM’s board and UBS, its broker, open the envelopes, looking for affection. It’s an uneasy love-me/love-me-not time, newspapers’ version of Match.com. Will DFM’s affection for the open market be returned, or will it be left searching love in all the wrong places? Rampant in the newspaper world this week: whispers, theories, and prognostications of how happy (or lovelorn) DFM will be by Friday.DFM, and its most powerful owner, Alden Global Capital, would love to sell off the whole company in one sale. No muss, no fuss, less time and fewer costs. That is unlikely. Start with DFM’s motley collection of titles, diverse in both geography and circulation size, from big metros to small community papers. Add to that the current uncertain state of the newspapering business, and it’s tough to come up with a logical bidder for the company’s 76 daily papers and 160 weeklies across 18 states. (“The newsonomics of auctioning off Digital First’s newspapers (and California schemin’)”). How much would DFM like to get for a company it likes to say reaches 67 million readers monthly across 18 states, from New England to California? Figure $500 million. That’s based on a likely EBITDA (earnings before interest, taxes, depreciation, and appreciation) of about $125 million, for a company earning a 10 percent-plus margin. A half billion dollars represents a 4× multiple of those earnings.
Most likely: Bidders would offer up potential affection for the six clusters DFM has subdivided itself into, anticipating the likely need for multiple buyers.
So now, midway through this sales process, what do would-be acquirers need? Let’s break that into parts.
First, they need more information. They’ve already been told that newspaper-related property will be sold off separately, as has been the trend over the last several years throughout the industry. (But, then again, if a buyer really wants related property, the right price will keep the deal whole.) Mostly, buyers need the deeper financials, to understand individual papers’ trajectories, the detail on changing revenues and costs. Buyers also say they need to understand better:
Second, buyers need a “theory.” Theory translated: Why the hell would anyone want to buy a newspaper in late 2014, given their still-plummeting financial fortunes — witnessed again this week by Tribune Publishing’s first quarterly report, noting a revenue drop-off of 5 percent in total, with ad revenues down 9.5 percent and digital ad revenues down 7.4 percent from the previous year?
So a buyer should have a theory of how to make money, starting in 2015 and through next several years, on any property bought. I debated several theories with industry leaders and watchers this week, and I think we can sum them up into three ideas:
The big idea: Print advertising may be in permanent decline, but there’s still lots of it. If you can buy print properties cheaply enough, and then exact the tech/sales/content synergies possible, the value of a metro-area print-based enterprise will increase. It’s Dean Singleton’s once precedent-setting clustering theories for this age, and it’s as yet unproven. Griffin, like GateHouse in smaller communities, plans to add on a digital services business to these metro properties; one top priority is expanding Tribune’s 435 Digital. So put Tribune in the hunt for some DFM properties. Likeliest: The LANG properties in greater L.A., allowing the L.A. Times to execute the Baltimore/Chicago strategy there. Most prized is the Long Beach Press-Telegram, serving a population of 600,000 right next to L.A. Orange County Register owner Aaron Kushner had prized that market as well before his fall; now his archrival Times is likeliest to dominate it.
Pierre Omidyar had been everyone’s favorite choice, given his deep pockets and civic consciousness. Local, though, has been something he’s said he’s not interested in. Maybe his recent escapades with Matt Taibbi (“The Pierre Omidyar Insurgency”) will cause him to give Bay Area newspaper ownership a second look — but don’t bet on it. In fact, the Bay Area — with one of the healthiest economies in the world — may seem like the biggest orphan in this process. Hearst owns the San Francisco Chronicle, and it is likely to be neither a buyer nor a seller. That further complicates the economics of buying DFM’s Mercury News, Contra Costa Times, and smaller dailies: How much print synergy can a new owner wring out of an area leading the globe in going profoundly digital?
Digital First Media CEO John Paton is an old hand at opening envelopes. He loves the dating and mating game of publishing. Assuming no whole company bids surface, then expect the partial selling of the named clusters. Since however, some of these clusters aren’t really logical clusters (like the Pioneer Press/East group), we can figure the poking and pursuing will take lots of twists and turns. By mid year 2015, new owners will be forced to bring new logic back to the romances of late 2014, setting their theories against real-time performance.