12-31-08 | Printable Version

4th Quarter & Year-End 2008

Deal Volume Falls in 2008
Tough Credit Markets, Recessionary Trends Slow Newspaper Sales

One method of dealing with a difficult economic environment like 2008 is to take a philosophical approach. So what better way to review the year’s newspaper sale activity than through the aphorisms of one of America’s great philosophers: Yogi Berra.

What follows is a series of famous (infamous) quotes from the former New York Yankee catcher and how they relate to the current deal climate.

It’s déjà vu all over again

In many ways, the last two years were a mirror-image of the boom-bust that occurred in the last U.S. recession. Following a record-setting year in 2007, just 16 daily newspapers changed hands last year in 11 deals valued at $883.6 million.

This was a far cry from the 91 dailies sold in 2007 worth more than $20 billion in total transaction value.

But it was certainly not unprecedented.

The previous record sales year occurred in 2000, when deal value exceeded $14 billion.

When the recession took hold in earnest in 2001, however, only 22 dailies got new owners and total value was just a touch over $200 million.

Sound familiar?

The future ain’t what it used to be
Coming out of the 2001 recession, deal volume began to ramp up again as newspapers regained their footing and bankers increased the amount of money they were willing to lend on deals.

This experience, however, may not necessarily be a good predictor of the near term outlook for newspaper deals. First, it is not clear when the current recession might begin to abate. Most newspaper publishers are expecting another challenging advertising year in 2009.

But a key difference in the current cycle compared with seven years ago is the evaporation of credit.

Just as favorable lending terms fueled strong acquisition activity from 2002 through 2007, the national financial crisis of 2008 shut it down abruptly. A number of deals failed to close last year for lack of financing, not for lack of buyers.

Uncertainty surrounding the credit markets continues to make the 2009 outlook murky.

It is our view that credit will be tight at least through the first half of 2009. However, we are beginning to see the first signs of conditions loosening.

A nickel ain’t worth a dime anymore

The pullback by lenders and a significant slide in ad revenue during 2008 contributed to somewhat lower valuations compared with prior years.

The private marketplace generally followed the public newspaper companies down over the course of the year. However, these valuations, usually expressed as multiples of cash flow, are not as far off the peak when viewed looking forward.

Most buyers in 2008 made offers based on expectations of lower revenue and earnings in 2009.

Therefore, when the newspaper business stabilizes, we expect multiples to settle in at higher levels.

If you don't know where you are going, you will wind up somewhere else
A number of buyers made important strategic acquisitions during 2008, positioning themselves strongly for the recovery.

The largest deal of the year was the sale of Tribune Co.’s New York Newsday to Cablevision, which accounted for a large chunk of the annual deal volume.

Cablevision sees significant synergies with its New York cable systems and professional sports assets.

Hearst Corp. bought the 76,000-circulation Connecticut Post and complementary weeklies from its partner MediaNews Group and took management control of other MediaNews Connecticut newspapers.

Other companies that made strategic acquisitions in 2008 included the Omaha World-Herald Co., which acquired two Nebraska dailies to augment its holdings in its home state; Larry Perrotto, who expanded a cluster in northwest Indiana/northeast Illinois; and the New York Times, which grew in central Florida.

Additionally, Walter Hussman’s Wehco Media added another state capital newspaper in Jefferson City, Missouri.

If the world were perfect, it wouldn’t be

As the year ended, additional deals involving daily newspapers were pending, but still awaiting final bank financing.

If these transactions come to fruition, the first quarter of 2009 would see a significant improvement in activity and could set the stage for increased deal flow.

Another factor that should help is declining newsprint prices. Many analysts are predicting a steady decline in newsprint pricing through the fourth quarter of 2009.