Equity Investments Come Flooding In: Private Equity Roundtable
Rossetti: We like the local advertising space a lot, and we think that the advertising cycle is going to turn up eventually. Debt financing is readily available, and the purchase price multiples, while lofty, are not going to go down any time soon. Much of the advertising erosion to the Internet has already happened, although some continued loss to online applications will happen.
Gilligan: We believe that the fundamentals of the newspaper industry are generally quite attractive for investors, particularly given the relative stability of the cash flows. We also happen to believe that the timing of our investment in Enterprise Newsmedia, LLC, represented a relative low point in the cycle of advertising spending, with encouraging prospects for the near term future. More specifically, our newspapers operate in the fastest growing geographic region in New England, with excellent prospects for continued retail expansion and growth in advertising spending.
DV&M: What makes newspapers attractive relative to other media or other industries in which you might consider in making an investment?
Simmons: We find community newspapers very attractive. They are typically the dominant media outlets in their respective markets and face limited competition. In small communities, the local newspaper is usually the best medium for advertisers to reach their customers. In addition, local direct advertising revenue is stable and less impacted by economic cycles.
Dominguez: Since Providence Equity invests principally in the media and communications industries, we consider newspapers to be an important component of our overall portfolio. Newspapers are typically strong local franchises with predictable cash flows and relatively low capital expenditures, which are just a few of the characteristics which make them attractive to us. Consistent with other media sectors in which we are invested, such as: television broadcast; cable television; magazine publishing and television programming, newspapers are attractive assets to own in both good markets and bad.
Klosk: Newspaper publishing is the oldest and largest segment of the media industry. Due to a focus on local news, newspapers remain the dominant medium for local advertising and received approximately 42% of local media advertising dollars in 2001 (with television and radio generating 18% and 16%, respectively). The resultant diversity of advertising sources makes local papers more resistant to the cyclicality commonly found in national and major account advertising.
Saville: We believe that small market newspapers enjoy strong franchise value and represent the cornerstone of local advertising expenditures and we don’t see that changing.
DV&M: Do you view newspapers as a fairly low-risk investment arena, and if so, are you willing to accept lower returns?
Klosk: Because of the industry’s lower volatility, our return expectations fall in the lower end of our acceptable range. We think we can enhance returns through selective, strategic add-on acquisitions.
Rossetti: We consider this industry to be lower risk than many of the industries in which we invest, and as a result we look for risk-adjusted returns that are marginally lower. Having said that, we still have a floor on our targeted returns that reflect the fact that we are a private equity fund looking for equity returns.
Gilligan: The answer is yes – we do view newspapers as low-risk investments – and to a degree, we would be willing to accept lower returns, although we will still look to invest in stories with a strong potential for multiple expansions to bridge the gap.
Dominguez: We consider newspapers, in general, to offer moderate levels of risk commensurate with moderate levels of growth. We firmly believe that with a reasonably levered capital structure, newspapers can weather economic downturns and the cyclical nature of an advertising-driven business. Given that many newspapers, particularly community papers, are the only source of local news in their communities, we see them as relatively insulated from economic cycles and competitive threats.
DV&M: Is the ability to finance newspaper acquisitions at attractive multiples and low interest rates a major consideration?
Saville: Yes, low interest rates permit faster repayment of principal, an important element in increasing equity value in this industry.
Simmons: The current strong senior debt market coupled with low interest rates does provide for an attractive cost of capital for a significant which can lead to inflated purchase price multiples.portion of our balance sheet. Unfortunately, this financing is generally available to everyone,We try to remind ourselves that when we go to sell a company down the road, the debt environment for the next buyer is likely to be less favorable than it is today.
Dominguez: Attractive financing always helps when making an acquisition. That being said, the robust debt markets were not a major consideration in the case of our decision to invest in Freedom. The company has a long history of operating with conservative levels of leverage and the continuing family shareholders had a strong desire to maintain a reasonable capital structure. Fortunately, we were able to structure a transaction that has a conservative level of leverage relative to what was available in the market and makes sense to both management and the shareholders.
DV&M: What annual returns (equity IRR) do you expect from newspapers?
Gilligan: We target returns in the mid-20% range, while we would still strive for high 20% to low 30% returns in most other industries.
Rossetti: Our money is 20% annual IRR money over the long term. We are seeking that return floor for each of our investments, regardless of the risk profile.
DV&M: Every industry has risk. What would be your biggest worry in the newspaper industry?
Klosk: The same risk private equity firms face in all of their investments – finding quality people to back as leaders of the enterprise. In our case, we are backing a great team.
Simmons: Sustained declines in circulation and a lack of younger readers threaten long-term industry growth rates and multiples. In addition, the “Wal-Martization” of small town America threatens many of the community newspaper industry’s best advertisers.
Saville: The industry has experienced meaningful turnover in the management ranks at many companies. A damaged operating unit in today’s environment is much more difficult to rehabilitate than 20 years ago. In our recent acquisition, the most important thing we bought was a stable, long-term group of employees.
DV&M: What’s your strategy for adding value to your investment?
Rossetti: This is the largest area of focus for us each time we make an investment. In the newspaper industry we look to maximize circulation penetration in each market and to make each community paper absolutely essential to each advertiser in the community. If we do this, we will improve all of the key operating metrics of the individual paper.
Saville: Investment in local editorial and innovative distribution strategies to create competitive advantage relative to other media.
Gilligan: Since our group of newspapers already generates respectable operating margins, our value creation strategy is driven by acquisitions. Our priority, naturally, would be “in market,” or contiguous, acquisitions where there would likely be very clear synergy in the combination. We also view Enterprise Newsmedia as an excellent platform for building a portfolio of daily and weekly newspapers in other like markets, with strong growth characteristics and compelling demographics.
DV&M: Do you think it makes sense to add other types of media (e.g., radio, TV, magazines, niche publications)?
Dominguez: There are significant benefits to owning a well-managed, diversified portfolio of assets which would include newspapers, broadcast stations and niche publications. It is not readily apparent, however, that significant operating synergies or cost savings can be achieved by adding other types of broadcast or publishing media to a newspaper company. The value of adding other assets, in our opinion, comes down to the core strengths of the management team and their ability effectively operate different types of businesses and find ways to make them complementary.
Klosk: It certainly makes sense to buy other papers (weeklies, shoppers) but not necessarily magazines or broadcasting. While we have owned businesses in all of these other mediums, the reality is that these are different businesses that have a number of similar characteristics. You cannot oversimplify the challenges faced by integrating different media. We will attempt this on a case-by-case basis.
Simmons: We will stay focused on our core business, which is running community newspapers. While we may opportunistically look to add other types of media to our platform, it won’t be a core component of our strategy.