We attended a "community" newspaper meeting last week to discuss how to improve business and how to solve common problems. As usual we find pleasure listening to and working with these front line small town dailies and weekly publications. They work hard, take care of their employees, and frankly publish darn good newspapers that serve their areas of concern. However the economic environment in which they operate is not a profitable as it once was in the industry.
However most of these newspaper ARE profitable and some are doing quite nicely if you consider total cash flow. There was a time when newspapers considered anything below 15% to 20% annual profits on total revenue to be sub par. We remember one newspaper we had association with in the past bragging about 33% "turnover ratio" one year. Today profits are below those percentages and sometimes in the 5% range. Guess what THAT is quite normal in most businesses.
The problem lies in the fact many of these newspapers built a business model on a 15% plus annual profits which included larger staffs, more leverage, and higher debt loads. The higher debt loads generally came in the form of mergers and buyouts of family operations by large chain operations. the big chain operators bought up family owned newspaper at high multiples ASSUMING that the cash flow would be there and they could pay off the debt with the profits. One chain McClatchy got in deep trouble doing do with a high priced purchase of another large chain right before the bottom fell out of the newspaper business. McClatchy in effect has never recovered from that mistake and is a shell of the operation it once was today saddled with huge debt. Other operations such as Freedom, New York Times, and Cox just sold off what they had at what was considered bargain basement pricing to pay off some of the accumulated debt or in Freedom's case bankruptcy sale.
The private capital who have bought these operations such as, Halifax, Cooke, and of late Warren Buffett's Berkshire are doing so at prices that would have been unheard of just ten years ago. Private equity can move in and make money making 5% to 7% on cash flow due to the even lower cost of borrowed capital right now. There are few big profitable chains anymore and those have trimmed staffs and cut costs to the bone just to operate under their heavy debt loads.
Frankly the remaining newspapers that are big city dailies are in our opinion doomed to fail or become a much smaller voice in their areas of concern. The competition in larger markets makes it impossible to carry on business as usual. However smaller dailies and weeklies in our opinion will continue to do well as they do not see the intense local competition and are still generally the only source of local news in their areas. No they will never see the 20 % plus profit months on a regular basis, but there is no reason they should not do 5% plus consistently in net profits. Many of them never took on heavy debt loads and continue to be an institution in their small towns.
Growth in these smaller newspapers will be minimal and only move with the local and national economy going forward. In our opinion we find these local enterprises a good buy here for those looking to make purchases. That is the reason private equity continues to do so. Unfortunately for many investors unless one is willing to purchase the direct assets of a newspapers much of this private equity exposure is not for purchase. Yes, one can buy some Berkshire Hathaway shares but the dilution to other businesses there makes direct exposure almost meaningless.
We do believe there is one place one can get exposure to newspapers going forward and that is Gannett Corp., symbol GCI, which has a nice portfolio of newspapers and has stabilized it's business model recently. Long term debt is manageable and being paid down, the stock pays a 4% plus dividend, and is diversified enough to be a going concern long term. They are moderately growing revenue as well. This play is not for the faint hearted however so buyer beware if the economy turns down. A price below $18 is more comfortable for us.
Full disclosure we do not own GCI currently but would consider at our noted strike price. We also perform newspaper consulting work with various concerns on a no fee basis.
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