A View from the Equity Side...and the Debt Side
In light of the recent turmoil in the credit markets and questions surrounding its potential impact on the newspaper marketplace, we recently caught up with six executives who either currently invest in/lend to the industry or are actively looking to do so.
DV&M: Does the recent crisis in the credit markets have any impact on how you view newspapers as an investment?
Kortick: Wicks has always focused on the community newspaper segment of the broader newspaper market and our overall deal size has remained within the middle-market. I am not sure that I would characterize some of the changes in the credit markets in these areas as a “crisis”. Across the board, lenders have recently tightened terms but in the middle-market community newspaper sector, lending multiples and other terms tend to move in a much narrower band than in the newspaper market overall.
Dehejia: Our perspective on newspapers as an investment are based primarily on the operating trends impacting the business such as circulation trends, consolidation of retail advertisers and movement of classified advertising from print to the web, rather than the state of the financing markets.
DV&M: Will you be forced to structure financing for newspaper and other media deals differently going forward?
Puchala: There will be a greater reliance on increased levels of equity financing.
Kortick: I do not think financing structures will be materially different for community newspaper transactions. However, there does seem to be less interest on the part of lenders in taking underwriting risk at the present time. The primary change in structure, therefore, will be that financings will be “club deals” among a number of lenders as opposed to having one institution underwrite the debt and syndicate it out.
DV&M: Is this a short-term or long-term issue for financing?
Dehejia: It is hard to predict how the financing markets will change over time. Lending spreads and total debt availability had reached very aggressive levels across all industries prior to this recent financing market correction. We expect that over the medium term, the financing market may open up a little bit, but we don’t expect to see a return to the lending environment of the late spring and early summer.
Puchala: This will be an intermediate to longer-term issue that will face the buy-out market. Many lending institutions and investment groups may fail first before the market stabilizes.
DV&M: Do you think this affects valuations of newspaper companies?
Dehejia: While financial theory states that financing availability and pricing should not affect asset valuations, in the real world it clearly does. Our perspective is that privately held newspaper companies, particularly smaller assets, weeklies/shoppers and those with lower “franchise” value ought to and will likely command lower valuations than they did over the past 18 to 24 months if they seek an exit in the current financial environment. However, over the longer term, the key operating factors affecting newspapers will remain the primary driver of valuations.
Puchala: Valuations for all good assets, including well run newspapers, in the market will be under pressure in the short term but over the longer term will rebound to attractive levels.
DV&M: Do you foresee more or fewer private equity investments in newspapers as a result of changes in the credit markets?
Puchala: There will be fewer pure play print investments as investors look for digital media plays. Hybrid businesses will do fine and those with predominantly print operations will be urged to organize a transition strategy.
Kortick: I don’t necessarily believe that changes in the credit markets will drive private equity firms to or from investing in newspapers. The recent market changes have impacted all industries so this is not unique to any one sector. Businesses that demonstrate stable growth trends, including certain segments of the newspapers industry, should continue to attract investment capital.
DV&M: What impact do you think the recent credit crunch, brought on by problems in the subprime arena, will have on financing for newspaper and other media deals?
VanderLugt: The credit markets over the last couple years saw progressively higher leverage, lower pricing, and less restrictive covenants and conditions. Despite lower supply, the good news is that there continues to be an adequate number of lending groups that run their business for the longer term, and are positioned to fund new opportunities with middle market media companies. I believe M&A activity will continue to be supported by the debt providers, the equity investors will continue to pursue the community newspaper sector for all of its attractive characteristics, and deals will get done.
Johnson: As a mezzanine investor that provides subordinated debt and preferred equity to media companies, we are typically involved in those transactions which utilize leverage in excess of traditional senior levels. Traditional buyers, with normal or below normal leverage of up to five times EBITDA, will be unaffected. Buyers with more aggressive capital structures will either reduce the price offered for purchases or use more junior capital; either mezzanine or equity, to complete a deal.
DV&M: Will lending ratios come down? If so, by how much?
Koetje: Yes. The loan markets as a whole have experienced a contraction in leverage multiples by 1.5 to 2 times due to lower valuation multiples and a much more fastidious lending community. We expect to see additional downward pressure on cash flow leverage multiples for newspaper issuers as it remains somewhat difficult to predict future cash flow impacts of the current weakness in ad spending, especially in the larger metro markets.
Johnson: Larger syndicated senior loans are likely to experience a reduction in availability and/or an increase in rate as neither agent banks nor borrowers may be willing to take the risk that an aggressive deal could not be fully syndicated. Rates may increase from 50 to 200 basis points, and leverage could decline by 0.5 to 1.0 turns of EBITDA, depending on the nature of the transaction.
DV&M: Has your interest in lending to newspaper companies for acquisitions changed in light of the recent credit market problems?
VanderLugt: Our view has not changed in light of the recent credit market fluctuations. We view ourselves as ‘investors,’ so we spend a lot of time getting to know sectors where we want to build a strong presence. Community newspapers is one of those sectors. Upon building that foundation, we possess strong opinions, experience, and expertise that allow us to be a stable provider of capital over time.
Koetje: While our lending parameters with regard to leverage, pricing and structures are going to remain aligned with the changing market dynamics, SunTrust is fully committed to working with our existing clients and potential new clients in order to deliver the right financing solutions and capital support for acquisition opportunities. Our balance sheet remains very strong despite the recent market turmoil and we continue to actively pursue mutually beneficial partnerships.
DV&M: Have any sources of financing disappeared?
Koetje: I don’t know if I’d use the term ‘disappeared,’ but there are definitely some sources of capital that have taken a temporary leave of absence. Many of the institutional investors we work with are still in business, albeit a little lighter with respect to their own access to liquidity, and waiting for some normalcy to return to the market.
VanderLugt: The number of financing sources has absolutely been impacted. I do believe that there are an adequate number of well-run capital providers, but more than ever, the differentiating characteristics should be fully explored and understood.
Johnson: Like borrowers, the lenders that are often the most vulnerable are those that have used the most leverage. Those lenders that have participated in transactions with comfortable capital structures remain active. Newspapers may not experience the higher revenue growth of past peak years, but they should enjoy sustainable cash flows in the years to come. Thus they retain our interest, along with that of many other lenders.