LAST WORD
The Newspaper Paradox
Ironically, the financial difficulties facing the newspaper industry may be the key driver in the record number of transactions taking place. BY MATT LOCHTE
T
he merger and acquisition market for newspapers has been breaking records in recent times. Indeed, 2019 was the best year for that activity since 2007, with transaction volume of over $1.3 billion, according to the M&A firm Dirks, Van Essen, Murray & April. The landmark $1.2 billion acquisition of Gannett Publishing by New Media/Gatehouse was responsible for most of that. But the train continued rolling in 2020 with Lee Enterprises’ purchase of BH Media’s newspapers for $140 million. That may seem paradoxical. When people contemplate the newspaper industry, they most likely think of an industry in decline. In this digital economy classified advertisements have migrated to Craigslist, Angie’s List, Autotrader and the like; advertising revenues have moved to Google and Facebook; and subscribers have become accustomed to free news available from multiple websites. Press releases from several newspaper companies describe year-over-year declines in print advertising and circulation revenue; voluntary restructurings under Chapter 11 of the U.S. Bankruptcy Code; and declines in EBITDA (earnings before interest, taxes, depreciation and amortization) of over 10%. This news came before the advent of the Covid-19 crisis. The coronavirus pandemic and economic slow-down will likely accelerate the decline of ad dollars flowing to newspapers, and it is uncertain if those dollars will return once the pandemic has receded. In 2019, Warren Buffett referred to the newspaper industry as “toast.” McClatchy’s February 2020 bankruptcy filing and the March 2020 U.S. outbreak of Covid-19 might seem like the final nails in the coffin. Given all this, it may not seem logical that buyers are motivated to acquire newspapers. But there are three main factors at play. 1. Despite declines in most key performance indicators, newspapers are still remarkably profitable. According to recent Securties and Exchange Commission filings, the operating cash flow margins for Lee
30 The Financial Manager • May/June 2020
Enterprises, The New York Times, Gannett and Tribune were 23%, 13%, 10% and 9%, respectively. Financial distress has been more related to debt load than operations. 2. Newspapers are cheap; Lee’s purchase of BH Media was at an adjusted EBITDA multiple of less than three times, a small fraction of prior years. 3. The existing subscriber bases and editorial infrastructure of newspapers
represent an excellent resource for digital operations. Three different pools of buyers have emerged. There are the traditional strategic buyers. This is evidenced in the Gannett-New Media Enterprises (Gatehouse) transaction. A merger allows for synergies and cost efficiencies. As financial difficulties in the newspaper industry have intensified, consolidation allows stronger competitors to acquire their struggling peers, buying additional time for the industry. A subset of the traditional buyer is the local strategic buyer where one operator strategically acquires a newspaper in close geographic proximity to one of their existing publications. This type of deal is evidenced in Tribune Publishing’s acquisition of the Virginia-Pilot serving Norfolk, which is near their existing Newport News Daily Press. A second type of acquirer is the busi-
nessperson who believes in the importance of maintaining viable local and national newspaper reporting. There are fewer of these types of transactions, but they tend to represent flagship publications. Jeff Bezos and The Washington Post, the late Gerry Lenfest and The Philadelphia Inquirer and Patrick Soon-Shiong’s acquisition of the Los Angeles Times and San Diego Union Tribune exemplify this trend. Financial companies make up the third pool of buyers. Private equity firms have incentives to make acquisitions that are heavy in plant and equipment, such as newspapers. Provisions in the Tax Cuts and Jobs Act of 2017 allow for bonus depreciation of business assets with a recovery period of 20 years or less. If a newspaper is purchased in an asset transaction, the bulk of its fixed assets are currently eligible for 100% depreciation in the year of acquisition. Some hedge funds and private equity firms seeking to shield income are attracted to not only that “plus” but two others: newspapers’ ability to generate cash flow as well as possible net operating losses. These three types of potential acquirers, combined with economics that are still viable, prove that even a very mature industry can provide attractive returns if it is managed carefully. Consolidation allows for efficiencies and synergies. It is likely, though not guaranteed, that the additional financial strains brought on by the COVID-19 crisis may hasten the merger trend given that large publications have brand value that can preserve them as local and national news sources, assuming that adequate funding and skillful management is available. Matt Lochte is a principal with Bond & Pecaro, Inc. in Washington, DC. He can be reached at mattlochte@bondpecaro.com or (202) 243-7416.
