Deal, or No Deal?

By: Mark Fitzgerald

Perhaps the best thing to happen for the depressed market for newspapers in 2009 was the sale that didn’t happen. After putting The Boston Globe on the auction block for months ? and getting at least two offers ? The New York Times Co. pulled the paper off the market. The explanation was that the company had won deep cost concessions from the Globe’s unions, and the paper was doing better financially.

But one broker, speaking privately, echoes the views of many in the newspaper mergers-and-acquisitions world when he says the Times Co. ? which paid $1.1 billion for the venerable Boston daily in 1993 ? was appalled at the low-ball offers. “I think the Times Co. did the right thing,” the broker says. “They said, ‘This is ridiculous. If this is all we can get, we’re better off running it ourselves.'”

By not selling, the Globe’s parent may well have avoided setting yet another new low in the sliding value of big-city newspapers ? a downward spiral many trace to The McClatchy Co.’s bargain-basement sale of the Star Tribune in Minneapolis to create a tax loss in December 2006. Not long after that, the industry recession kicked in, and the number and size of newspaper sales dropped off dramatically.

But 2010 is likely to be the year in which newspapers began selling again in earnest ? though in a completely changed environment, with different buyers and lower prices than those of the blockbuster era of the late 1990s and early 2000s. That’s when acquisitive McClatchy, Tribune Co. and Lee Enterprises scooped up entire chains such as Knight Ridder, Times Mirror Co. and Pulitzer Inc. for billions.

Brokers say there is a large pool of publishers who have wanted to sell their papers for the past two or three years ? and will be willing to deal as the economy improves and banks begin lending again.

“There’s a huge supply out there ? just go to my Web site,” laughs Larry Grimes, president of the Gaithersburg, Md.-based national newspaper mergers-and-acquisitions firm W.B. Grimes & Co. “We have 50 newspapers for sale right now. And the problem is, that of those 50, speaking conservatively, 40 of them are ideal situations for strategic buyers, with the buyers in those markets for the most part being groups. And groups are totally on the sidelines right now.” (In the jargon of newspaper brokers, a strategic buyer is someone picking up a newspaper to add to an existing cluster or fill in a gap in market coverage.)

But in the grim past two years, new kinds of buyers emerged who will be the drivers for growth in the newspaper M&A business in 2010, says Owen Van Essen, president of Santa Fe, N.M.-based Dirks, Van Essen & Murray, the nation’s largest newspaper broker and the one usually called upon to handle the biggest deals: “Buyers for newspapers now are a continually changing group that in 2009 doesn’t resemble what we had even two years ago.”

He notes, for instance, that several family-owned groups of smaller news-papers that hadn’t bought new papers in years purchased nearby papers. And while the private equity groups that were active in the blockbuster era are loathe to invest again in newspapers, a few contrarian private equity groups bought properties such as The San Diego Union-Tribune.

“Absent from the list are the traditional players such as CNHI (Community Newspaper Holdings Inc.) or Gannett Co., who were so very acquisition-minded for decades,” says Van Essen. “Going forward, I think you’ll see a similar trend. The buyers won’t be any of the companies with significant debt loads.”

Community opportunity
The kind of newspapers that will come on to the market in 2010 will also be different, M&A experts say. They agree that the era of billion-dollar deals is gone, perhaps forever. As 2009 was drawing to a close, in fact, not a single sale was valued at more than $25 million. Instead, the market is likely to be filled with community papers put up for sale by publishers who had expected to sell two or three years ago.

“Sellers have been sitting on the sidelines a lot longer than they wanted to. There’s a definite pent-up seller demand,” says John Cribb, a principal in Bozeman, Mont.-based Cribb, Greene & Associates, which specializes in sales of small and mid-sized newspapers.

Owners of those papers have been reluctant to sell because the valuations of newspapers ? generally calculated as a multiple of cash flow ? have been so poor, he says. “The good news is that those papers are not doing so badly that they have to sell,” adds Cribb. “There would be a lot more papers on the market if those folks weren’t making it.”

In recent months, brokers say, most sellers have come to accept that they will never again see the high multiples of 10, 11 or even 12 times cash flow that were common selling prices for dailies over the past couple of decades. Still, there is some disconnect among sellers who think their papers are worth the prices of yesterday ? and buyers who want to get them for a song, says Larry Grimes. “Getting buyers to believe they should pay five or six times cash flow ? which is a very fair price ? is still like pulling teeth,” he says. “They’re saying, ‘How can you expect me to pay five times when these other papers are going for two or three?'”

But the surprisingly low prices seen in the past year were for distressed sales, generally by publicly traded companies looking to pay down debt quickly. Brokers say the owners putting new papers on the market in 2010 will not be so “motivated,” as they say in real estate. “More buyers are coming off the sidelines, but several have told me that they want to get today’s prices ? and the sellers are still thinking in terms of yesterday,” says Ted Rickenbacher, president of Dallas-based Rickenbacher Media.

Banker, can you spare a dime?
Rickenbacher believes buyers will be willing to pay more in 2010, for one simple reason. “There’s just too much investment money sitting on the sidelines, so they will pay higher multiples, I think,” he says.

Financing, though, remains the biggest hurdle to jump-starting the newspaper M&A market. Talk to brokers about the banks, and they all repeat the same word. “Because the newspaper industry has done such as dreadfully good job of making everyone think newspapers are going to be extinct, the banks think newspapers are toxic assets,” says Larry Grimes. He’s echoed by John Cribb: “We’re a toxic industry as far as banks are concerned, and that’s going to stick with us probably for a year or a couple of years after the recovery ? and we’re not in recovery yet.”

With bank loans still not a realistic option, brokers are returning to some past financing strategies. Cribb, for instance, believes seller financing will be used in more deals. “It’s the grease that is going to get us unstuck, and the only vehicle for financing in the foreseeable future,” he says. Seller financing has long been a way to facilitate sales of small newspapers, he notes. “I personally have been doing it for more than 25 years,” he says. “It’s been around and it’s been tested, and it works just fine.”

To avoid defaults, the buyer and seller must agree on a reasonable price, Cribb adds: “You don’t want to get a great price up front, and then the buyer can’t handle the payments.”

Larry Grimes, however, is leery about leaning on seller financing precisely because of the danger that the under-financed buyer will default ? leaving the seller with the newspaper again. “In almost all the situations that we’ve encountered over the last year-and-a-half where the buyer has asked the seller to finance most of the deal, there’s been a problem with the buyer’s credit or his cash or his available resources to carry through with the deal,” he says.

The swashbuckling hedge funds and other private equity groups that propelled acquisitions at the beginning of the decade are unlikely to take a big role in financing in 2010. But Dirks, Van Essen & Murray President Owen Van Essen is betting that private equity will return in the form of insurance companies lending to newspaper buyers.

“Historically, in the 1950s and 1960s and even into the 1970s, insurance companies were principal lenders to those acquiring newspapers,” he says. One of the big players, Jefferson-Pilot Corp., which later merged into Lincoln Financial Group, not only advanced money for acquisition and newspaper start-ups, it became a newspaper owner in the early 1970s.

Whoever is willing to finance news-paper deals will find eager buyers, Van Essen says: “If you rely only on the national press, it’s easy to conclude that the industry is in such distress that nobody wants to buy newspapers. That’s certainly not true. It wasn’t true in 2009 ? and we think it will be even less true in 2010.”

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