Is the agreement by a new local group of Philadelphia investors to buy The Philadelphia Inquirer and the Daily News from McClatchy any sort of vote of confidence in the future of daily newspapers? I’m afraid not. But we still may be able to scratch out some good news in this outcome.
The price being paid, $562 million in cash and debt assumption, is about nine times the reported EBITDA of the newspapers (EBITDA is “earnings before interest, taxes, depreciation and amortization,” which approximates operating income). This is based on 2005 earnings of about $62 million. However, income at the two Philadelphia papers has been declining for years. Indeed, 2004 income was about $75 million. And one can’t argue that 2005 was just a down year for the economy.
Nine times EBITDA would not be a bad deal for a growing property. But if income declines by a similar percentage in 2006, the price would be 11 times EBDITA—a rather rich price. Still, if the winning bid had been placed by an experienced newspaper group such as Gannett there might have been some reasonable room for speculating that there was serious hope for turning around the direction of these two declining newspapers. But, alas, it was a local group of investors, with no known experience in publishing. Thus, one must assume that part of the valuation they placed on the properties was "“home town” sentimentality, maybe boosterism, perhaps charity, or even naiveté that they had a “plan for turning things around.
It was probably some combination of all the above.
Though I would tend to be skeptical that the new management has any magic for substantially changing the growth vector of the newspapers, there is some reason for very cautious optimism. The other side of the naiveté coin is fresh thinking, such as offering “fixed slots to repeat advertisers." Not being saddled with the tradition of the ways of newspaper publishing, this new group may be able to implement strategies or specific programs that come out of their very different backgrounds: residential home building (Toll Brothers), consumer packaged goods (NutriSystem), an insurance brokerage, even a labor union pension fund.
Also, coming from outside newspaper publishing, these investors may not be basing their calculations on obtaining the profit margins that traditional publishers have become used to. Knight Ridder’s profit margin in 2004 was over 19%, which is about what newspaper publishers expect. The Philadelphia newspapers reportedly had a margin of half that, clearly dragging down the overall corporate rate. But for manufacturing industries in general, 9% is pretty good. For example, in the home building industry, 5% net income is typical. So perhaps these investors decided that an investment that could return close to 10% ain’t too bad. That might actually be a positive sign for a newspaper if it was in the context of a strategy to position it for a changeover to a greater emphasis on online income.
As the TV reporters like to end with, where this goes remain to be seen. But see it we will. Stay tuned.
Note: At my Who Owns the Media Blog I have taken a different angle on this deal, focusing on the media ownership implications.
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