Print on the precipice

The story of the potential forced sale of Knight-Ridder has everybody in the newspaper business nervous, and rightly so. The Los Angeles Times has an excellent story today called As Knight Ridder Goes, So May News Industry, and I don’t think that’s overstating the case. According to new circulations statistics, newspaper circulation is down 2.6%, and while we’re finding the occasional rationalization, the preponderence of reaction is that the industry is in real trouble.

To get some insight into the what’s happening here from a business perspective, I turned to old friend and industry stock analyst, James M. Marsh, Managing Partner of Hanover Square Capital Management, LLC. Marsh is one of the brightest and most candid analysts on the block, and I’ve come to appreciate his insight. He says it’ll be harder to sell newspaper properties than it may seem. Here’s his e‑mail response to my questions:

It’s an interesting situation. I see a number of divergent themes.

On one hand, the economy has grown at a real rate of 3% or higher since the middle of 2002, yet newspapers cannot jump-start their top lines and are increasingly focused on cutting costs. Secular issues seem to be swamping cyclical ones.

The stocks are trading at 10 times forward EBITDA (at the upper end of their typical 7–11 times range), yet have lowered their growth expectations consistently for the past three years. Public investors seem to have not adjusted their expectations to the new slower growth outlook.

The industry is apparently for sale, but there seems to be no buyers. Private equity players seem to be on the sidelines for now.

I think this is a classical case of disrupting technology ravaging an incumbent. The signs are everywhere:

Circulation trends are increasingly negative. Even worse, the coveted younger demographic is long gone. Competition from the Internet is the big problem, but TV and free newspapers are having an impact.

High margin classified advertising is under assault. Both from Monster.com and Hotjobs.com, but soon from Google and other vertical search services. The natural monopoly that classified once enjoyed is gone.

Newspaper managers are not sure what to do. Cutting costs in a desperate attempt to maintain EBITDA margins.
I am skeptical about a take-out boosting stock prices for a few reasons:

1) They are not cheap enough yet.

2) Private equity metrics don’t yet work.

3) There is no obvious exit strategy for financial players.

4) Consolidating newspaper properties results in very few revenue or cost synergies.

5) Unions will make financial engineering more difficult

6) Newspapers have been cutting costs for 5 years, not much fat is left to cut.

7) Some newspaper managers believe they answer to a higher calling of journalism, so may not be willing to make the tough choices necessary to bolster returns.

8) Many of the companies have super-vote stock so they would need to be a willing seller.

TV stations groups are not in a dissimilar position. I thought the news from CBS and NBC was ominous. Networks will disintermediate their distribution partners at some stage, it is really only a matter of time. TV stations generate more free cash flow than newspapers so might be more easily taken private or LBO’d.

Those are the facts from a guy who really knows. Frankly, I think the television business would be in a much better position from which to weather the transitional storm if the companies were privately held, and I’m going to make that one of my predictions for 2006.

Comments

  1. Hi Terry,
    It’d be interesting to note WHERE circulation is increasing. For instance, at the SAJA convention this summer, I heard NPR’s circulation keeps going up. Is that true? And are there other areas if you look at media broadly.

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