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Sept. 25, 2014, 10:37 a.m.
Business Models

The newsonomics of auctioning off Digital First’s newspapers (and California schemin’)

More than 200 newspapers are up for sale — as one group, in clusters, or one by one. Where they go could have a big impact on how the industry will look in the coming years.

Could the sale of the Digital First Media properties lead to the U.S.’s first quasi-national newspaper company?

That’s the hope of DFM’s current owners, and the shiniest lure tossed out into the newspaper property marketplace by UBS, the unorthodox pick of DFM to be its banker/broker as its six dozen dailies are being shopped. Digital First Media finally announced the sale of its papers two weeks ago, confirming my April report (“The newsonomics of Digital First Media’s Thunderdome implosion and coming sale”) that the company had begun deep cost-cutting, with an eye toward profit maximization, as it prepared to sell its far-flung assets.

As is usually the case in such announcements, “For Sale” isn’t the big sign appended to the release; hiring a banker to “review strategic alternatives” is the standard wording. In this case, there’s more meaning to those words.

While the greatest likelihood is that DFM’s properties will end up being sold off regionally, in clusters here and there, the pick of UBS shows the big sale dream here: Sell to, or merge, with another big newspaper owner, creating a newspaper company with more than 100 dailies, creating the largest chain of dailies in U.S. history.

On one hand, that seems totally logical; on the other, it could be considered pure folly. Let’s consider both. Let’s put some numbers on what potential buyers will find as they open the DFM books and do their own number crunching. Let’s further look at this week’s series of events in San Diego and Orange County in light of the DFM sale, and how the press in the nation’s largest state (and eighth-largest world economy) reels into disorder, with 86-year-old philanthropist Malin Burnham channeling the spirit of Sid Harman offering to turn the San Diego daily into a nonprofit civic utility, and Orange County Register Aaron Kushner pursuing his unique business strategy of Whack-A-Mole.

First, consider Digital First Media itself. As a company, DFM couldn’t officially claim to be the country’s second-largest-circulation newspaper concern until Dec. 31, 2013, when with the formal merger of two companies that had seen a combined three bankruptcies, Digital First Media became that big company. (CEO John Paton had taken over management of both MediaNews Group and Journal Register Company in September 2011.) DFM now encompasses 76 daily papers and 160 weeklies, with a claimed reach of 67 million readers monthly across 18 states.

It’s been a long and quite tortured story — from days of Lean Dean Singleton, whose clustering skills created MediaNews, to Journal Register’s history as the Kmart of daily newspapering. The new DFM became a hard-to-tame beast. The big MediaNews papers (San Jose Mercury News, Contra Costa Times, Denver Post) haven’t conformed easily to the digital-first culture CEO John Paton had been able to impose on JRC’s smaller papers. There have been clashes of culture, of personality, and of some substance.

This isn’t a fire sale, but an orderly process of maximizing value for DFM’s owners, led by Alden Global Capital, the dominant shareholder, though with something less than 50 percent ownership. Alden never intended to be a long-term owner — it is a turnaround buyer and seller of distressed assets — and its four-year-plus run will likely be over by early next year. That length of ownership is par for the course for hedge fund owners. As part of the process, the company is following the lead of most of its peers, selling off the real estate associated with the newspaper properties. Already, according to The Denver Post, the company has sold 67 parcels across the country and is currently marketing another “70 newspaper buildings, containing 1.7 million square feet, with an estimated value of $85 million.”

With the real estate shorn, how much is this perhaps unwieldy beast worth?

Let’s figure that that, overall, DFM newspapers will sell for four or five times their annual EBITDA, or earnings before interest, taxes, depreciation, and amortization. That’s the range we’ve seen in recent sales from Worcester to Providence to Riverside. The calculation for each property is highly dependent not just on its performance, but on its marketplace and its competition, with metros generally valued lower than smaller community dailies. Still, though, the 4-5× multiple is a useful guide.

Based on it, we’d believe that overall DFM newspapers will fetch somewhere around half a billion dollars, more or less. The EBITDA, I’ve learned, comes in at about $125 million — $500 million would be 4× $625 million would be 5×. That’s close to the value of Tribune’s eight dailies, now trading just above a half billion dollars.

Which brings us to the dream of the single sale. For the seller, of course, one sale is easiest, fastest, and cheapest, considering transactional costs and time. But how realistic an idea is it?

  • The argument for folly: Who’d want to buy dozens of newspapers? The industry’s print advertising revenue is in barely controlled freefall, down eight percent a year since 2011; this budget season’s now-familiar gut-wrenching forecast for 2015 is the same. Paywall-related revenue and digital advertising initiatives have only partially offset that loss. Consequently, figure it’s been more than a hundred months of unending downward revenue trajectory; 2005 was the last year of significant revenue growth. Only deep cost-cutting, including the downsizing of America’s daily newsrooms by 30 percent or 20,000 jobs, has maintained high single-digit to to low-double-digit profitability. How long can that strategy last before the last print subscriber cancels in frustration?
  • The argument for Consolidation: Ask anyone who studies business beyond newspapers and they’ll tell you that in any maturing industry, consolidation is a logical response. Fewer owners produce synergies of cost savings from corporate staffs to payroll processing. We see a major consolidation underway in newspapers’ cousins, local broadcast. There, the last couple of years have produced a flurry of consolidation deals which, ironically, have led to legendary newspaper publishers like Gannett, Tribune, and Scripps all claiming their business futures as broadcasters, spinning off their newspaper properties. As stark as the revenue decline is the continuing profitability of these newspaper companies. Your small community daily that is down to half its former newsroom size still pumps out a couple of million dollars in profit; some metros still generate more millions. So, maybe, all this decline is manageable — either for the next four or five years, when your investment pays off, or when newspaper companies finally cross over into mainly digital, and more stably profitable, enterprises.

For instance, take DFM’s profitability. It’s $125 million in net operating profit is based on a margin running just over 10 percent across the chain. Maintain that profit, or something close to it, for five years — through some business advances and more cost-cutting — and the acquisition would have paid for itself.

Who might believe that story?

Two companies backed by venture capital have been recent buyers: Halifax Media Group (buyer of the Worcester Telegram & Gazette and a couple of others since its purchase of the New York Times Company’s Regional Newspaper Group in 2012) and the new Gatehouse/New Media (recent buyer of the Providence Journal), which has announced a $150-$300 million war chest for newspaper company purchases. Does either company have the stomach — and obtainable financing — for such a big deal?

Then there’s Warren Buffett’s Berkshire Hathaway Media, which bought all of Media General’s small papers two years ago. Buffett may not be able to pull off as good of a all-around deal (“Berkshire Hathaway Media Group: Financial Engineering Makes the Deal”) as he did with Media General, but he certainly has the capital and the market logic — for many of the smaller papers, if not the metros — to make the deal work.

Then there’s Gannett, preparing to spin off its newspapers, and with the cash to make it work, though it’d be a tough tale to get investors to swallow. Consider that unlikely, but not impossible.

These buyers may believe that at the right price they can both continue the profit streams and be able to make money on their own sale of these properties down the road. Then there are the strategic/civic buyers like John Henry, Jeff Bezos, and Glen Taylor, billionaires who have bought into and invested in the best big-city metros, presumably for a longer while.

Will any billionaires (there are 439 left in the U.S. without a daily to their name) comes out of the blue to buy DFM properties like the Mercury News — in the heart of billionaire-rich Silicon Valley — or The Denver Post? (Colorado billionaire Philip Anschutz, owner of the Colorado Springs Gazette, seems a likely bidder for the DFM Colorado papers, turning a key purple state’s press profoundly red.) We may soon find out — if the single big sale to a consolidator doesn’t happen. Expect that UBS will have fully explored the single sale idea by Thanksgiving. If there is no one big deal to be had, then the auction would move on to regional clusters. That’s second best for DFM: six or more transactions, wrapped up by spring. Then, of course, there’s the least-liked scenario: selling off papers in onesies and twosies.

DFM’s first contingency plan is to offer the papers in six clusters:

—Southern California, the Los Angeles New Group properties

— the Bay Area News Group, the dominant group of 11 Bay Area dailies, including the Mercury News and the Contra Costa Times

— a NorCal group of smaller Bay Area dailies on the coast and I-80 corridor

— the Colorado/Utah group, consisting of nine Colorado dailies, including The Denver Post, and numerous weeklies, and the Salt Lake Tribune, a strong alternative to the Deseret Morning News whose survival has already been in much question

— a New Mexico/Texas group of smaller properties

— the Saint Paul Pioneer Press, still the main competitor to the Star Tribune in the Twin Cities, and many mid-sized to smaller dailies and weeklies in Michigan, New York, Ohio, Pennsylvania, New Jersey, and Connecticut, the largest of which is the New Haven Register

It’s likely some of these clusters would sell as a whole, others wouldn’t, and lots of follow-on sales could be expected. That sets up a myriad of possible owners, including, as Mother Jones publisher Steve Katz has noted, nonprofit Silicon Valley ownership.

Digital First Media’s large presence in California only heightens the drama of what newspapering may look like there — even as soon as 2017. DFM properties are only a part of that puzzle, which became more puzzling over the last week.

In San Diego, further word emerged that controversial owner Doug Manchester, who bought the Union-Tribune three years ago was open to selling it, as I reported in April. The surprise in that: Papa Doug Manchester, the voice of barely bridled capitalism, was in discussion to sell the U-T San Diego (son of the San Diego Union-Tribune) to a do-gooder nonprofit, run by a board of locals. How could he allow it, much less make it happen, and to what sufficient tax advantage? (He would keep the property the U-T sits on, the most important asset for the developer.)

Yet, there it is, San Diego philanthropist Malin Burnham saying Papa Doug has given him his blessing to try get the deal, through local fundraising and IRS talking. How serious is it? (That’s a tough question to answer about the serial follies of newspapering in southern California.) Well, Burnham is acknowledging that he doesn’t know much about the journalism business, though he’s already talking about how to distribute the struggling paper’s profits to select nonprofits, bless his community heart. The paper, whose newsroom has declined from 389 in 2005 to 160 today, isn’t a basket case, but it’s in serious need of the kind of investment and spirited management we’re now seeing at The Boston Globe and The Washington Post, if it’s to better serve California’s second biggest city and secure its business future.

Let’s be clear: 86-year-old Burnham stepping in is admirable, reminiscent of Sid Harman “saving” Newsweek just a year before he passed away. Just as clear, as Voice of San Diego noted, there are more questions here than answers. But this fact remains: The U-T is for sale.

Just north, Aaron Kushner has this week pushed the limits of self-delusion still further, after the June layoffs (“The newsonomics of life after newspapers go solo — and new intrigue in L.A.”). His open letter to staff spoke of growth, expansion, and bravery. Translation: more layoffs and the closure of his spring ballyhoo, the L.A. Register, the limp product that showed none of the seriousness needed to compete. This week, Kushner sold his headquarters building, but that money, we believe, is largely spoken for. Further, he announced a new distribution relationship for the Orange County Register; its competitor, the L.A. Times, had distributed the paper, and the Register’s late payables had threatened to end that relationship. Going forward, expect that the financial tightness that has the Register blaming ADP for “payroll glitches” won’t disappear.

So let’s recap the state of newspapering in the southern California, from Simi Valley to the Tijuana border.

The Los Angeles News Group, the fourth player and probably unprofitable, is up for sale. The San Diego Union-Tribune is up for sale. The Orange County Register and its recently acquired sibling the Riverside Press Enterprise are bailing water and will likely be in new ownership hands by this time next year. Guess who that leaves: The Los Angeles Times, one of the Tribune properties that Sam Zell dragged through the mud, but which has now, how ironically, emerged as the strongest player, financially and journalistically, in a territory that could encompass as many as 20 million potential news consumers.

Tribune Publishing, spun off from broadcast-centric Tribune Media less than two months ago (“The newsonomics of splitting up media companies, with Gannett maybe next”), may not have a lot of cash under the floorboards, but it’s solidly set, and has responsible drivers. CEO Jack Griffin surprised many by naming Austin Beutner as publisher of the Times in August. Beutner, a venture capitalist with no publishing experience but deep understanding of media and business overall, is still settling in. Given the chaos around the Times, though, he’s got a new to-do to add to his list: Figure out the economics of buying any of the many available newspaper company assets across the region. Which of these might make strategic sense, and at what price, and which are best to let founder, avoiding unnecessary cost and organizational headaches? I have no doubt that his private whiteboard is filled with contingencies.

The key to the southern California map is finding the real synergies of smartly combining business and editorial work within the larger single geography. These kinds of synergies are much more likely to be real — and countable — than the potential synergies of a still far-flung “national” newspaper company.

All around the Times, and I’m sure within the newsroom as well, are many fledgling screenwriters, looking for just the right tale to tell. Surely, one of them will grasp the engaging characters in this unfolding drama. Austin Beutner, the shrewd dealmaker waiting for the game to come to him. Aaron Kushner, the Music Man who came to Santa Ana. And, of course, Papa Doug Manchester, the latter-day Citizen Kane, whose publishing future looks like it will be undeveloped. Let the writing — and the casting — begin.

Photo of California beach by Charles Siritho used under a Creative Commons license.

POSTED     Sept. 25, 2014, 10:37 a.m.
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