What Does Philadelphia Newspaper Auction Say About the Value of Newspapers?

By: Mark Fitzgerald The furious last-minute bidding for Philadelphia Newspapers -- which saw the price bumping up $10 million in cash each round, according to participants -- thrilled some newspaper brokers as much as losing bidder Brian Tierney. They say it is a sign that newspaper valuations are bouncing back from the depressed levels of the last two years.

With a winning bid by senior lenders of $139 million, the parent company of The Philadelphia Inquirer and Philadelphia Daily News sold for far more than anyone expected -- certainly more than the $60 million the local investors group offered soon after the papers filed for bankruptcy protection in February 2009.

"It clearly has now moved the needle from the desperation side of things," said Larry Grimes of the mergers and acquisitions firm W.B. Grimes & Co. "It takes us from the, -- what would you call it, the Cox valuation? -- up to a more normalized pricing structure."

The reference was to the forced sale last month of the Daytona Beach (Fla.) News-Journal for just $20 million. In 2006 a court ruled the paper had a value of nearly $300 million. It was a deal that touched a nerve in the newspaper M&A community.

"In my opinion, the toxic sale in Daytona Beach was a totally bizarre, a rock-bottom, true fire-sale price," Grimes said.

The Philadelphia sale can be seen "as a prime indicator of the rebound in newspaper valuations -- and people's perception of the value of a newspaper," said Greg Knowles of Knowles Media Brokerage Services in Bakersfield, Calif. "Because that's been the situation all along -- perception."

Like other brokers who specialize in smaller dailies and community newspapers, Knowles maintains the multiples at which papers are selling has slipped but not fallen off a cliff.

"I feel like we may have hit bottom in the last six to 12 months in valuations," Knowles said. "What I feel is there is a recovery in progress and that values will recover."

Of course, even at $139 million, the winning bid for Philadelphia Newspapers is well below the $515 the Tierney-led group paid to The McClatchy Co. in 2006, when sold it off a dozen dailies acquired in its purchase of Knight Ridder.

The auction purchase also includes the newspaper's Central City Philadelphia office building and other real estate, which for purposes of the bankruptcy was valued at $30 million.

But depending on how you look at it, Philadelphia Newspapers sold for a quite high multiple -- or at a discount to the valuations of peers.

Earlier this month, the Inquirer in a story by Christopher K. Hepp reported that the newspapers projected annual cash flow, or EBITDA, at $12.6 million.

Simple division would suggest a multiple of slightly more than 11x (11 times EBITDA). That's the sort of multiple metro dailies fetched at the height of market. Even if the real estate is excluded from the purchase price, the pro forma multiple is a healthy 8.65x.

But that's probably not the way the Angelo, Gordon Co. hedge fund and the other senior lenders in the successful bidding group see the purchase price.

Newspaper consultant Alan D. Mutter -- whose musings about the Daytona sale in his Reflections of a Newsosaur blog touched off a mini-firestorm among brokers -- suggests making a different calculation.

He notes that Robert Hall, who is being brought back to run the papers, has said the lenders have identified some $20 million in expenses that they believe can be wrung out "immediately." Add that to the EBITDA figure and you get a multiple of 4.25x, a discount, he says, to the public value of 8x for Lee Enterprises Inc., 7x for Gannett Co. Inc., and 5.6x for The McClatchy Co.

The publicly announced structure of the deal -- $69 million in cash equity, $39.2 million in debt and the $30 million purported value of the real estate -- is complex and vague enough that at least one broker declined to speculate on is effect on valuations. "If you can explain it to me, I might be able to comment," he said.

But what might be most significant about the auction, in the view of some brokers, is not just that the lenders steadily raised their bid after starting at $77 million -- but that they bid at all.

"The Philadelphia deal most importantly shows a couple of things," W.B. Grimes' Larry Grimes said, "One, that the banks have confidence that as the economy improves, these newspapers are going to come back. They're going to rebound, and rebound nicely."

Second, Grimes said, the present ownership and management won't be rewarded for letting the papers fall into bankruptcy by being able to keep them at a hugely discounted price .

"Hopefully it's a sign that that they are not just writing off (their investment)," he added. "They're saying, no, we're not going to give it away. We have confidence this thing can be turned around."