By: George Garneau
AFTER YEARS OF watching other newspaper chains score big in the acquisition sweepstakes, E.W. Scripps Co. has bagged a sizable trophy of its own: Harte-Hanks Communications Inc.’s six dailies and broadcast operations.
The price ? which could range from $605 million for an all-stock deal to $775 for an all-cash deal, or 12 to 16 times 1996 cash flow ? is “attractive” in part because of the flexibility, said Scripps president and CEO William Burleigh.
“These are the kinds of newspaper markets we know how to run,” Burleigh said, comparing Harte-Hanks’ mid-size Texas markets with cities where Scripps owns papers.
Scripps, the Cincinnati-based publisher of the Rocky Mountain News, posted revenues of $1.1 billion last year, compared with Harte-Hanks’ $174.8 million.
The price and structure of the final deal hinge on the fate of what is known as the Morris Trust type of transaction, a kind of corporate shell game that allows companies to avoid capital gains taxes when transferring assets, and sometimes debt. A bill in Congress would curtail such deals ? used by Times Mirror Co. to spin off its cable TV systems to Cox and by Disney to sell key Capital Cities/ABC newspapers to Knight-Ridder ? but no action is expected until later this year.
A straight stock purchase would cost Scripps $605 million in stock without incurring debt. A combination deal would cost $425 million in stock but bring $200 million in debt. And if Congress closes the Morris Trust loophole, the $775 million cash price would bring Scripps higher tax deductions, and its stock repurchase plan would ease the pain of an expected 5% dip in per-share earnings in the first year. For Harte-Hanks, the bigger cash price would be needed to pay a heftier capital gains tax.
While both sides favor the Morris Trust route, all the scenarios come out essentially the same for Scripps, executives said.
The acquisition would add 235,000 to Scripps’ U.S. daily newspaper circulation, and 289,000 Sunday. With 16 dailies and 1.2 million circulation daily, 1.3 million Sunday, Scripps is now the 11th largest U.S. daily newspaper publisher. After the deal, it would jump to eighth largest, with a stable of 22 dailies and circulation of 1.4 million daily, 1.6 million Sunday.
Scripps executives said the deal will diversify the company geographically and provide a presence in a strong regional economy. Five of the six dailies are in Texas, as is KENS-TV, San Antonio’s news leader, and KENS-AM, which would become Scripps’ only radio station.
Harte-Hanks said it was getting out of newspapers, the business it was founded upon, in order to focus on its direct marketing businesses, which bring in the bulk of its revenues and are growing far faster. For example, the company’s direct marketing unit posted 29.3% higher revenue in the fourth quarter of last year, compared with 3.1% higher newspaper revenues.
Harte-Hanks’ Texas papers, headed by the flagship, Corpus Christi Caller-Times (70,000 daily, 92,000 Sunday), include the Abilene Reporter-News (41,000, 51,000), Wichita Falls Times Record News (38,000, 45,000), San Angelo Standard-Times (33,000, 39,000), and Plano Star Courier (11,000, 13,000).
In South Carolina, the Anderson Independent-Mail has 42,000 daily circulation, 48,000 Sunday. And the group’s 25 nondailies include a weekly group in suburban Dallas with 95,000 circulation.
Last year the Harte-Hanks properties papers generated $138 million in revenue ($112 million from newspapers, $26 million from broadcasting) and $48 million in operating cash flow ($36 million from newspapers, $12 million from broadcasting).
By the time Scripps takes over, beginning in 1998, it expects cash flow from the Harte-Hanks properties to surge 20% to $65 million ? $50 million from the newspapers, $15 million from KENS.
Nick Jimenez, editorial page editor at the Caller- Times, said he was more surprised at Harte-Hanks’ decision three months ago to sell the papers than at the sale agreement with Scripps.
“The uncertainty is over, and we can move on to other things now,” he said, recalling Harte-Hanks’ nearly 70 years of ownership, during which the city grew from little more than a fishing village to a bustling metropolitan area.
“That’s a long history of community involvement . . . and the paper has prospered under their guidance,” he said, adding that Scripps is “saying all the right things about autonomy and letting people do their jobs.”
John Morton of Morton Research Inc. in Silver Spring, Md., said Scripps way paying “full price” for desirable properties.
“Properties like this don’t come along very often,” he said. “It’s a ready-made cluster in a state with generally above-average growth. And the cities are relatively isolated, meaning other papers won’t eat away at the fringes of their territory.”
The markets took the news well. On the New York Stock Exchange May 19, Scripps shares closed down 12.5? to $38.125 and Harte-Hanks shares rose $1.125 to $30.125.
Nobody expects profits to improve dramatically at the Harte-Hanks papers. In 1995 they were the third most profitable publicly traded newspaper group in terms of operating profit margin: 21.8%. The most profitable public paper, the Buffalo News, cranked out an amazing 29.9% operating profit margin, and Scripps ranked sixth with an average newspaper operating margin of 19.6%, according to the latest Veronis Shuler & Associates Communications Industry Report.
Scripps executives said KENS-TV might lift margins to 50% or more, from 45%.
Alan Horton, senior vice president of the Scripps publishing division, said the Harte-Hanks papers were well run and had better than average market penetrations, many peripheral print products, and online services.
He also cited some “near term pricing opportunity” ? some ad rates lower than at comparable papers elsewhere. He also cited potential revenue growth from niche products.
William Bird, an analyst with Smith Barney, called it a solid deal at a low to mid-range price.
“I wouldn’t say they’re getting a fire sale price, but a reasonable price,” he said. “I think they are good assets in a healthy market and these are the kind of properties they are so good at running.”
An anticipated decline in earnings per share could turn around as early as the second or third year, he said.
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?(copyright: Editor & Publisher May 24, 1997)