If newspapers are dying why do they cost so much to buy?

First a declaration of interests: I have done and am doing work for a rival newspaper in this area, the excellent Sarasota Observer, a weekly hyperlocal with a slightly lower weekly circulation to the SH-T's daily one and which recently attempted to launch in Bradenton (before my time working with them) and pulled out when real estate advertising went south.

A bit of desk research. I can't help loving the aggression of Gatehouse Media, who have been snapping up newspaper properties in the past year or so like newspapers were going out of fashion, which, of course, everyone says they are. Their strategy appears to be to purchase small locally focussed properties and consolidate around hubs where possible, though even they haven't been as disciplined as their strategy would suggest if you look at their business map.

They are betting that if you can control an area in print with a number of small nimble hyperlocal and hyperuseful newspapers and sites, you can still make good money in newspapers. Risky but it makes more sense than owning one huge metro title and hoping it can hang on to all that local revenue as if it were your birthright.

They have been busy. According to their Q2 filings Gatehouse spent about $800 million on purchases this year. They bought Copley Press for $380 million and snapped up another four dailies from Gannett for $410m.
That's a lot of money to be throwing at a dying industry. So what sort of values are being put on newspapers if these deals are typical.

The Gatehouse release about the Copley Press deal says that "the 9 publications are comprised of 7 daily and 2 weekly newspapers organized in 3 clusters around Springfield, IL, Peoria, IL and Canton, OH. The total combined daily circulation of these papers is 241,060. The 2 weekly newspapers have a combined circulation of 34,918." So if you divide the weeklies by seven and add them to the daily total Gatehouse have bought 246,048 daily readers. Which adds up to $3,251 per daily reader.

The Gannett deal? The papers have 165,000 readers each day. Those readers cost Gatehouse $410m. So each daily reader is worth $2,484. A bargain.

So the Bradenton Herald with a circulation, according to McClatchy of 41,000 during the week and 48,000 on Sunday would be worth between $104m to $136 million. The Sarasota Herald Tribune with a circulation of about 110,000 would be worth $273m to $357 million.

Now that seems staggering to me. The SH-T is overpriced for advertisers and it's a poor excuse for an editorial product. It isn't worth 357m Turkish lira let alone US dollars. You could nearly buy the Chicago White Sox for that, according to Forbes magazine..

Maybe Gatehouse are just big payers. Or maybe there's something I'm missing.

So I thought I'd go to the Knight Ridder deal and see if I could work out sensible multiples. McClatchy sold the Star-Tribune in 2007 for $530m. It has a circulation of 378,000 according to this company presentation about the Knight Ridder purchase, call it 420,000 including Sunday That would make it worth a mere $1,261 a reader. That would put the SH-T at $138m and the BH at $54.2 million. That sounds a bit more like it but it still seems a lot, maybe a multiple of 10x profit, which isn't the sort of multiple you'd expect from a "dying" business.

Now I am aware that multiples vary from industry to industry and business to business (oh yes, that LBS MBA really comes in handy) but what's kind of normal? My first Google attempt threw up this piece which suggests a five times EBIT (Earnings before interest and tax) as a maximum. as a benchmark, and it's a number I've heard before. It's hard to know EBIT at newspapers that are part of groups. But McClatchy say that Bradenton's total revenues are $38 million. Average margin at the K-R papers retained by McClatchy was 30%. So operating cash flow of $12m at a 5x multiple puts the Bradenton Herald value at about $60m. Now that is starting to get a bit more realistic.

Reversing back the value per reader suggests that each of the 43,000 readers of the Bradenton Herald is worth $1,395 per reader. I wonder if they know it.

I don't have the data to do the maths on the SH-T because it's wrapped in NYTCO's numbers. But at the same reader multiples as the Star-Tribune it's worth $138 million. Still a lot.

But what about our friendly overpayers Gatehouse? Do they sell as high as they buy? They also sold the Herald Dispatch recently to Champion for $77m. The paper has a daily circulation, according to this site, of 29,000. That is a value per reader of $2,655. So they aren't the only ones with faith in small titles.

So apart from finding some use for the very large business valuation tomes I have in my office, what is the point of all this?

Well I think it suggests that smaller titles have a higher relative value than larger ones at the moment. Gatehouse have paid through the nose for small geographical titles that are close together. But the price per reader was higher than for the Minneapolis Star Tribune. It suggests that the market has definitely bought the idea that smaller local papers can survive in an internet world though it has doubts about larger ones.

Secondly it emphasise the market's view that newspapers are not a dying business. Multiples in dying industries are starkly different to anything you find in newspapers.

It also makes me think that I'd like to start a newspaper and attack some comfy metro incumbents. If you believe that you can enter the market of a top 100 newspaper, create a daily rival with a paid circulation of 29,000 and get Gatehouse to pay you $77 million for it then I think you could earn a great return on investment.

You've got the email address if you need any help.

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