Monday, March 9, 2009

Newspapers circling the drain Part II

Soon after I started working at the T&G I knew enough about the revenue side to seriously question what was being paid for newspapers.

Assuming you're looking for a 10% return on investment on capital, and need to achieve that from ongoing operations, then most I could see a newspaper being worth was around $1,000 per unit of circulation. Unless you're running a Ponzi scheme, that's the only way you truly make money in the long term -- from the underlying business earnings.

Hearst bought the Chronicle after the Times bought the T&G from the Chronicle.
Hearst paid $1,375 per unit circulation for the Chronicle.Times paid $2,757 per unit circulation for the T&G.In 1993 the Times paid $1,666 per unit circulation for the Globe (averaging daily and Sunday circulation).

If you took the difference between $1,000/circulation I figure was a fair value and what was paid for these papers and bought investment grade securities earning 4% instead, today Hearst would have $250 Million extra in the bank and Times would have $1 Billion extra.

With the Chronicle losing $50-70M in 2009, that $250M combined with reasonable business cost cutting would by them 4, 5, 6 years to weather this economic storm.

The Times currently has $1.1 Billion in debt -- including $250 Million in a loan from a Mexican businessman at an unbelievable 14% interest rate! Had they not overpaid for the Globe and T&G, they could be nearly debt free today. Had they not built an new headquarters building...they too would have several hundred million in cash and investments on hand.

These bad decisions have now hamstrung the old media companies.

Given changes in the business since then (collapse in advertising) and substantial risk, off the top of my head I wouldn't value a newspaper at more then $400/unit circulation today. That price gives you some ability to see your investment appreciate -- if things turn around with the economy and the industry, you might see $500-600 values be reasonable in the next 5 years or so.

As a sanity check, I just googled this which has Barclay's valuing the Globe at $192M and the T&G at $18M. That gives the Globe a value of $458 per unit circulation and the T&G a value of $180 per unit circulation.

For the T&G, I suspect the analyst didn't credit the T&G's modern printing plant in Millbury to the T&G -- figuring it's worth at least $12M and shifting that value from the Globe to T&G...both papers end up right around $400 per unit circulation. So I think I still have a good handle of newspaper values, MBA or no MBA. :)

Can you make money in newspapers today?


First step though is to run them through bankruptcy. They're carrying debts that are not supportable by their underlying value, and those have to go. Even in cases where just enough cash can be squeezed to make loan payments, a realistic valuation of assets is likely to trigger convenents to call the loans. Executives made bad decisions, investors made bad decisions...bankruptcy is the way those mistakes are corrected.

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