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July 22, 2015, 4:37 p.m.
Business Models

Newsonomics: How much is the Financial Times worth, and who might buy it?

It depends on whether you think the brighter future for news lies in readers or advertisers paying the bills. But then again, an FT sale may involve as much ego as accounting.

If you wanted to buy a top business news publisher, which one would you choose?

Assuming the marketplace offered you choice, would you go the newer-media route, buying a Business Insider or a Quartz? Or would you be tempted to buy the Financial Times, established in 1888 and now a clear leader in the legacy press’ transition to digital reading and advertising?

That’s just one of the many questions raised by the report that suitors are knocking on the door of Pearson, the global education company that, in what has sometimes been an odd fit, owns the FT.

If the news report surprised few — rumors of Pearson selling the FT have circulated frequently over the years — the would-be purchase price shocked more. Bloomberg reported a valuation of as much as $1.6 billion (£1 billion). If the price reached that height, it would come in at more than 16× the FT’s earnings. That would be astounding number for a newspaper property in these still-transforming times. As you’d expect, the FT won’t comment on the sales speculation.

[Update: 7/24: Updated FT data, from the Pearson announcement of its sale shows lesser revenues and profits than I reported in this column. The earlier numbers, which could only be extrapolated, showed that I had greatly overshot both numbers in my reporting. (I had at least gotten the profit margin of about 7 percent right.) We now know the FT Group generates £334 million ($518 million) of sales and £24 million ($37 million) of adjusted operating income. Given that The Economist (of which FT owns half — see below — but which isn’t going to Nikkei in the deal) contributes some of that profit, as do a couple of other ventures, we can now figure about $30 million in actual FT operating income. That’s a multiple of 43×, or a price 10 times what an average U.S. daily, large or small, would sell for today. For greater explanation of this pricing data, and more on the FT sale to Nikkei, see new column, “Newsonomics: Eight questions (and answers) about Nikkei’s surprise purchase of the FT.”]

We may be able to judge the reality of such a price sooner than later. Whether a sale gets announced this year or not, most observers close to the question agree: A sale is a question of when, not if.

The odd fit of the FT in today’s Pearson is one reason. As Pearson CEO John Fallon has recently tried to centralize many of the functions of the company, including technology, he’s met resistance within the FT — only the latest case of the education and media businesses chafing against one another. Second, Pearson’s core education business is now facing significant disruption, with the loss of the New York State testing account reported as recently as two weeks ago. The company draws more than 75 percent of its revenues from education and now needs to rehabilitate that core. Fallon said last fall that the business would “start to stabilise next year and then return to growth in future years.” We’ll get a better picture of Pearson finances Friday — and whether they’ve improved or worsened — as the company announces its half-yearly financials.

Here’s the logic for a sale: Fallon cashes out of the FT (if a buyer will pay enough), balms Pearson’s wounds, funds more operating turnaround, and moves some financial shells around for shareholders.

Then there’s the flipside. Why sell the one part of the company that has recently fueled the most growth? The Bloomberg story has met with much skepticism in London, the FT’s cradle, even though its U.S. circulation now leads its U.K. readership. Pooh-poohers point to Pearson’s pension obligations, and make the salient point that I highlighted in February: Pearson’s Professional group, of which the FT is the major driver, turned in a 10× better job of profit growth than its other divisions. So why sell it and be left only with its education businesses, in self-acknowledged rehab?

Either scenario is buyable. Pearson announced that its Mergermarket business intelligence service was on the block four months before that sale was announced in November 2013, so we may even get some public indication of the Financial Times’ availability at the end of this week.

Mergermarket, then a part of the FT Group, sold for £382 million ($610 million), which represented a 15× multiple of operating income. That’s a sales metric very close to the $1.6 billion pricetag reported for the FT. The big difference: Mergermarket serves a niche audience a highly specialized product and charges a lot for it. The FT — even with its affluent business audience and its leadership in the industry noted — still finds itself in the midst of the travails of a print-to-digital transformation.

At a 16× price, an FT sale would come in at roughly four times what current U.S. newspaper acquisitions are going for. Most U.S. newspaper sales now range from a 3.5× to 5× multiple of annual earnings. In the halcyon days of buying and selling, they could fetch 10-12× — but that was 10 or more years ago, an eternity in this business.

16×? Financially, it doesn’t make a lot of sense. But then again, an FT sale may involve as much ego as accounting. Put the numbers aside, as Rupert Murdoch did in 2007 when he paid twice as much as its worth for Dow Jones and The Wall Street Journal — the dream of owning a global business-news franchise can be justified by sheer words. Consider globalization, the rising business class from Asia to Latin America to Africa, and the ascendancy of English as the worldwide English business language. How could one not wring billions out of those converging phenomena over the long term? In addition to ego, it’ll take vision — and lots of cash, of course.

Forget rational thinking — calculate the trophy value. Whatever it takes in money, whatever silly multiple the financial people tell me, the chance to buy one of the world’s leading and respected publishers comes along only rarely. Rupert Murdoch bought Dow Jones out family ownership in 2007 — the only time it had been sold since 1902. Five generations of Sulzbergers have owned The New York Times since 1896. Pearson bought the FT in 1957.

So our short list could start once again with Murdoch, who can tick off all the boxes of ego, ambition, vision, and cash. But Rupert has seemed more interested in owning The Wall Street Journal — letting the sheen of its long-ago-won prestige reflect on him — than in really turning it into the dominant global business news provider.

Who else? Michael Bloomberg’s name must be mentioned, even if, interestingly, the Bloomberg piece on the sale omitted it. Then there’s Mathias Döpfner, CEO of Axel Springer, who has been furiously transforming his German media giant into the highest-profile European player in digital media (“What are they thinking? Eight principles for Mathias Döpfner’s transformation of Axel Springer”). Thomson Reuters must make any list as well. Others have suggested Gulf sheiks, Russian oligarchs, or Hong Kong’s media investors, though culture would tell us that Pearson would feel some obligation to turn the storied franchise over to a more certain steward of democratic values.

We can look at those would-be suitors — but first let’s assess the standing and the reality of the Financial Times.

A crossover leader

The Financial Times stands as a crossover champ in the news industry. When I first asked then managing director Rob Grimshaw in 2009 to whom he looked for publishing leadership, he hesitated. Then he offered “Amazon.” Since then, the FT has led the news industry up the ladder in paywall thinking (coming up with the metered model, later adapted by The New York Times), in analytics, and in audience-centric multiplatform premium ad sales, among other innovations. I’ve covered those developments (on analytics and on its leadership generally) here in the past.

We can see its leadership — and future business promise — in two key data points:

  • Reader revenue drives a majority of its revenues, with advertising a strong second source of revenue. Total circulation has grown to 720,000 across print and online, a 10 percent year-over-year increase, pending Friday’s latest update. By contrast, most newspaper companies can only attribute 25 to 35 percent of their revenues to reader payment in the U.S.
  • Digital revenue is more than 40 percent of total income. Digital subscribers represent more than 70 percent of the FT’s total paying audience. A majority of that audience is brought in through enterprise license agreements, though it has also both transitioned many individual print readers to digital and sold subscriptions to new ones. By contrast, most newspaper companies can still only attribute 10 to 15 percent of their revenues to digital.

The FT clearly is over a hump. In tripling its profits in 2014 (“Newsonomics: The Financial Times triples its profits and swaps champagne flutes for martini glasses”), the company has plainly shown progress.

And yet, in a candid conversation with me then, John Ridding, head of that Professional group and CEO of the FT, acknowledged that the issue was this: “Where do we go next? You can’t stand still. We are rethinking key elements again.” Yes, the pay system has clearly worked, but may have stifled growth too much. The FT must still tweak its formula, continuing to test new metered tactics, and figure out the challenge of managing the ebbing away of its more than £100 million pounds in print advertising.

Though Pearson’s last reorganization in 2013 further complicated and obfuscated its financial reporting, we can estimate that the FT generates about £60-70 million (or $100 million) in operating profit a year — independent of its 50 percent stake in The Economist. (That stake, which only provides the FT with minor Economist board representation, would have to be rationalized in any transaction.)

Market position

Let’s get back to our opening question, the relative value of the FT compared to business news startups. One big difference, of course, is revenue: The FT brings in more than £700 million (or $1.1 billion) a year, many times what Business Insider or Quartz can so far muster. The FT is a mature business measuring itself on profit and then revenue growth, while both Business Insider and Quartz both still pursue audience growth and then revenue growth as early principle goals. The FT’s tough paywall limits overall traffic, but is optimized for reader revenue.

That means that in overall, U.S. multiplatform unique visitors, it comes in at number 38 in the Business News category, according to comScore, showing a 9 percent year-over-year increase. (The full chart is at the bottom of this column.) Business Insider, optimized for social and search referrals, managed a 52 percent growth rate over the same period, and ranks second in the category to the leader, Yahoo Finance. Quartz (not shown in the chart) ranks 23rd, with 5.7 million unique visitors, up 119 percent year-over-year.

Globally, the FT ranks 61st, down 27 percent year-over-year. Business Insider again ranks second — showing how it has extended its reach well beyond the U.S. in itssix years since launch. Quartz ranks 64th in this subcategory, with 2.9 million desktop unique visitors, up 53 percent year-over-year. Bloomberg, Dow Jones, Forbes, and others all rank higher, both globally and in U.S. unique audience. All except Dow Jones, whose freemium pay system offers a fair amount of free content, don’t impede traffic with paywalls. (Note: comScore’s global tally only counts desktop visitors at this point.)

For its part, the FT makes a point of saying that it doesn’t use comScore data, instead using its own AGDA (average daily global audience) count, audited by PWC, as a way of netting out its multidevice usership. By those numbers, the FT is up 10 percent year-over-year in unique visitors.

It’s a bit of apples and oranges, but what do we make of these numbers? The FT’s revenue and paywall strategies clearly limit competitive unique audience growth. These unique counts, though, don’t show us the power of engagement — and that’s been an FT priority for a number of years. Its aim: Get a smaller number of largely paying readers to use the FT a lot. The FT can show evidence that strategy is working.

All that said, in 2015, it’s impossible to call the winners in U.S. and global business races. We have two models at play here. One is the FT’s and The Wall Street Journal’s, to a large extent. (Dow Jones CEO Will Lewis reiterated his view on the central importance of reader revenue recently.) They both put reader revenue at the forefront of their business strategies, accepting reduced audience growth in the process. On the other hand, the free sites engage in a free-for-all for readers in the land rush that is today’s web, believing that advertising in some form will follow in big supply.

If you think free is right, Business Insider at a price one-eighth (or less) of the FT may be a better buy. Quartz too, if Atlantic Media owner David Bradley ever decided to shop it. But if you believe reader revenue is the absolute right path forward — given the deepening dominance of Google and Facebook in advertising — the FT could be the better buy.

Potential buyers

While potential buyers may come out of the blue — as Hong Kong-based Whale Integrated Media did when it bought control of Forbes last year — we can handicap the usual suspects relatively quickly.

Bloomberg, with 2,400 journalists, Thomson Reuters with 2,500, and Dow Jones with about 1,800 could all look at significant synergies in combining some operations with the FT, which employs 600 journalists and 2,200 overall. That’s just in content, of course; there are also lots of potential business-side synergies. But those synergies often pencil out better than they prove out, and they stir great internal disruption and delay time-to-market strategies as well.

Bloomberg makes a certain sense. But then its Bloomberg Media identity (as distinct from the terminal business and thinking that so permeates the place) has only raised new questions about how Michael Bloomberg charts the company’s future. Still, the opportunistic, once-in-a-lifetime chance to buy the FT may prove irresistible. Similarly, both Dow Jones — as still-new CEO Lewis recharts the company’s course — and Thomson Reuters have experienced several stumbles in executing on their business news strategies — but they still must assess an acquisition (or a competitor’s acquisition) of the FT.

Then there’s Axel Springer. CEO Mathias Döpfner’s aims are global, and Springer led the January investment round in Business Insider. The company has the ambition, but it’s now involved in merger talks with ProSieben, a major German broadcaster, the timing of which would complicate an FT buy. A German company buying the FT and its office on the Thames? That could produce in interesting reaction in these days when European nationalism is on the rise, and Prime Minister David Cameron promises a vote on U.K. European Union membership as early as next year. Still, don’t expect emotion to derail such a sale.

In the end, sales of such magnitude ride on more than price — including the intangible of personality. There’s business culture, perceived strategic fit, and the simple handshake, with the three of Murdoch’s, Bloomberg’s and Döpfner’s each offering a far different story.

U.S. business news category
U.S. multi-platform unique visitors (in thousands) June 2014 June 2015 % change
1 Yahoo Finance 72,668 72,582 0
2 Business Insider 26,083 39,625 52
3 Forbes Digital 27,656 36,956 34
4 Dow Jones & Company 29,537 30,134 2
5 IBT Media 21,323 26,396 24
6 Bloomberg 19,757 25,639 30
7 CNN Money 15,622 21,528 38
8 CNBC 12,431 19,241 55
9 AOL Money & Finance 22,215 17,860 -20
10 MSN Money 14,195 14,810 4
11 Sites 7,325 12,054 65
12 TheStreet Sites 10,168 11,626 14
13 Reuters Sites 8,703 11,600 33
14 Motley Fool 10,989 10,287 -6
15 11,050 10,070 -9
38 Financial Times Group 1,189 1,296 9
Global business news category
Worldwide desktop unique visitors (in thousands) May 2014 May 2015 % Change
1 28,007 60,471 116
2 MSN Money 24,371 58,574 140
3 China Economic Net 55,476 44,881 -19
4 Yahoo Finance 51,784 40,316 -22
5 Finance 39,501 38,138 -3
6 Sina Finance 34,824 36,215 4
7 48,869 35,590 -27
8 Business 35,622 34,370 -4
9 Business & Finance 29,237 31,494 8
10 Forbes Digital 25,980 30,645 18
11 Money 24,105 27,657 15
12 Business Insider 20,207 24,578 22
13 IBT Media 20,689 24,479 18
14 Dow Jones & Company 30,561 24,475 -20
15 Bloomberg 20,777 19,677 -5
61 Financial Times Group 4,630 3,400 -27

2013 photo by Financial Times used under a Creative Commons license.

POSTED     July 22, 2015, 4:37 p.m.
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