Newspaper ownership - buyer beware

EStreetJoe · Apr 8, 2008

Newspapers are a profitable, but risky, investment.

http://www.forbes.com/2008/04/07/newspapers-advertising-biz-media-cx_lh_0407papers.html?partner=yahootix

Dead Trees
Newspapers: Buyer Beware
Louis Hau04.08.08, 6:00 AM ET

So why would anyone buy a newspaper? Well, for one thing, they make money. Despite the Internet and the slowing economy, many newspapers remain highly profitable.

"They still tend to have pretty strong market position in their local markets, the deepest investment in newsgathering and content of any other companies in their local area and they can monetize that with premium ad rates that have translated into good earnings and cash flow,'' said John Puchalla, a credit analyst for Moody's (nyse: MCO - news - people ). "The tough revenue environment makes it an unattractive equity story, but if you're conservatively levered, you can manage through these downturns."

Moreover, the newspaper operations of publicly traded media companies posted an average operating margin of nearly 17% in 2007, according to independent newspaper analyst John Morton.

As a result, even amid sinking newspaper valuations and falling revenue from print advertising, smaller clusters of newspapers have found buyers in recent months, particularly community newspapers that haven't lost as many readers or advertisers to the Internet as large metro papers.

But before signing on the dotted line, suitors would be wise to take a lesson from the Journal Register Co. (nyse: JRC - news - people ), which hired Lazard Freres (nyse: LAZ - news - people ) on Monday to help it evaluate "strategic options," usually code for "on the block."

In 2004, the company paid $415 million to acquire 21st Century Newspapers, the publisher of four daily newspapers and 87 nondaily publications in Michigan. Then a recession blew into the state and advertising dried up. In February, Journal Register reported fourth-quarter 2007 earnings that included a non-cash charge of $181.3 million for the impairment of assets and goodwill, mostly related to a decline in the value of its Michigan properties.

Last week the Yardley, Pa., newspaper publisher said the New York Stock Exchange warned it faced possible delisting after its shares fell below the minimum average closing price of $1 during the previous 30-day trading period. A Journal Register spokesman couldn't be immediately reached Monday for comment.

It's not alone in having trouble following an acquisition. A host of companies hobbled themselves recently with ill-timed newspaper deals that magnified the impact of declining print advertising. At the end of March, Lee Enterprises (nyse: LEE - news - people ), which acquired the Pulitzer newspaper chain in 2005 for $1.46 billion, warned that it expects to record non-cash impairment charges in its second fiscal quarter of $500 million to $700 million after taxes.

McClatchy (nyse: MNI - news - people ), which acquired the former Knight-Ridder chain in a little-contested sale in 2006, reported non-cash after-tax impairment charges of $1.47 billion in its fourth-quarter results, which came on the heels of impairment charges of $1.37 billion that the company reported in the previous quarter. (Both write-downs exceed McClatchy's current market capitalization, about $875 million.) It's also worth recalling that McClatchy sold the Star-Tribuneof Minneapolis to Avista Capital Partners in 2006 for $530 million plus an added tax benefit of $160 million--about half of what the company paid for the paper in 1998.

And last week, bond research firm Gimme Credit warned that Tribune, which real estate mogul Sam Zell took private in December in an $8.2 billion buyout, is at risk of defaulting on its loan covenants in 2009.

"Clearly the higher leverage you have, the quicker a tougher revenue environment can translate into financial difficulty," newspaper analyst Morton said.

It hasn't stopped the buying, though. In November, Tribune completed the sale of two small southern Connecticut newspapers to Hearst for $62 million. In December, Gatehouse Media (nyse: GHS - news - people ) closed on the purchase of several daily and non-daily newspapers from Morris Publishing Group for $115 million.

One big metro daily--Tribune's Newsday--could benefit from a reported bidding war among News Corp. (nyse: NWS - news - people ), publisher of the New York Post; Mort Zuckerman, chairman of the New York Daily News; and James Dolan, chief executive of Cablevision (nyse: CVC - news - people ).

But as the market for print advertising continues to worsen and deal financing becomes harder to come by, other newspaper properties on the block could have a tough time seeking buyers.

Landmark Communications (other-otc: LAKCA - news - people ), the parent of The Weather Channel and daily newspapers like The Virginian-Pilot of Norfolk, Va., and the Roanoke Times, said in January that it retained J.P. Morgan and Lehman Brothers to help review strategic alternatives, including a possible sale of the company's businesses.

News Corp. is believed to be interested in selling the Ottaway Newspaper Group, a publisher of community newspapers in the Northeast and Oregon that it acquired last year through its purchase of Dow Jones.

The valuations that these papers fetch could provide a barometer of how much the advertising downturn and secular shift to the Internet has infected the smaller end of the newspaper market. It probably won't be pretty.
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2muchcoffeeman · Apr 8, 2008

O RLY?

sportschick · Apr 8, 2008

Ugh.

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Newspaper ownership - buyer beware

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