Newspapers Not Black and White for PE, but Opportunities Exist
August 29, 2013
Amazon.com founder Jeff Bezos’ $250 million purchase of the Washington Post and Boston Red Sox owner John Henry’s $70 million Boston Globe buy appear to mark a new era in traditional print journalism. With billionaire backers and a likely willingness to find new sources of revenue and readership for an industry that is largely seeing both dwindle, these two East Coast papers—and the owners behind them—could become future models for how traditional journalism can thrive.Naturally, having lots of money can allay short-to-medium concerns about making money, but the long-term commitment it will require to turn financially distressed newspapers around makes them a tough sell for private equity (PE) firms.
The above chart shows the number of private equity investments made in newspaper companies since 2004.
PE firms executed numerous transactions for U.S.-based newspapers and their holding companies in the run-up to the financial crisis (55 from 2004-2007, according to PitchBook data), right around the time when online news aggregators and blogs began to take flight, and dailies began to see their advertising dollars and subscriber counts shrink.
Since the financial crisis, private equity firms have largely, and perhaps smartly, stayed away from the industry—just 21 PE investments have been made in newspaper companies since 2008. And it makes sense. The need for PE firms to sell their portfolio companies to generate returns for their LPs is the main detriment to making a bet on major-metro dailies, which may require more than the traditional five to seven years to turn around.
But that hasn’t turned some middle-market firms away from the industry, particularly for smaller community papers, where solid cash flow can still be generated and competition is minimal. And PE firms that hope to pay down debt generated in a buyout and eventually exit at a profit will want to see that steady stream of capital. Consolidation also seems like a good bet for firms that decide to purchase newspaper companies, particularly as papers struggle to generate earnings and keep operating margins high enough to sustain current operations. The larger the operation, the more advantages it has in keeping costs down and identifying growth opportunities across the business.
For example, Versa Capital Management, the Philadelphia PE firm, acquired over the span of a year (from 2011 to 2012) four media and publishing companies that operate daily newspapers in smaller cities and towns with few competitors, and in September last year combined all four into one company, Civitas Media. The platform creation has reduced debt, according to the new company’s CEO, Michael Bush.
“[Previously], we were several companies once highly leveraged,” Bush told The Wall Street Journal in September last year. “Now together we’re much less leveraged. We have the financial strength to do some investment in our consolidation and transformation and take care of our debt.”
Billionaire investor Warren Buffett has also made a similar bet on smaller, profitable newspapers with Berkshire Hathaway’s $142 million purchase of 60 newspapers from Media General in June last year, as well as numerous other one-off purchases across the United States, including his hometown Omaha World-Herald.
His reasoning for purchasing newspaper companies, particularly at the local level, is similar. Said Buffett in his 2012 annual shareholder letter: “Newspapers continue to reign supreme in the delivery of local news. If you want to know what’s going on in your town— whether the news is about the mayor or taxes or high school football— there is no substitute for a local newspaper that is doing its job. A story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents. … I believe that papers delivering comprehensive and reliable information to tightly bound communities and having a sensible Internet strategy will remain viable for a long time. At appropriate prices—and that means at a very low multiple of current earnings—we will purchase more papers of the type we like.”