Valuation Guide: Newspaper Publishing

Description of the Industry

The newspaper publishing industry (SIC 2711-98, NAICS 511110) is engaged in the production of daily, weekly, and bi-weekly newspapers as well as Internet news services. The U.S. newspaper industry includes about 5,000 companies earning combined annual revenue of about $35 billion with the top 50 companies controlling about 80 percent of the market.[1]

Although individual publishing companies have adapted to shifting market conditions with varying degrees of success, many agree that the newspaper publishing industry as a whole is in decline.  Average circulation has begun to slip, and the industry’s previously high profit margins are beginning to decrease.[2]  Annual growth over the last five years has averaged –8.1 percent.[3]  Revenues are expected to decline an additional 2.6 percent in 2012.[4]

More than 70 percent of newspaper publishing revenue comes from sales of advertising space, with the remainder primarily coming from subscription and single-copy sales.[1]An individual firm’s profitability is mostly dependent on its marketing expertise.  The industry is labor-intensive due to a need for labor for content production, layout, sales, and distribution.[3]

Most newspapers do not face many other directly competing newspapers.  In general, most regions have only one dominant newspaper.  The primary competition in the publishing industry is from other media outlets, such as the Internet.[2]

Some of the major newspaper publishing companies include:

1. Gannett Co. Inc.
   Gannett is a broadcast, digital, mobile, and print media company.  The company publishes 82 daily newspapers in the U.S., including USA TODAY. The company also operates about 500 non-daily publications.  According to Gannett’s most recent annual report, Gannett’s U.S. newspapers reach 11.6 million people per weekday and 12.6 million each Sunday.  During the most recent year, circulation declined in almost all markets.  Approximately 47% of all circulation is from single-copy sales.[5]
2. Tribune Company
   The Tribune Company is a publishing, digital, and broadcasting company.  The Chicago Tribune serves as the foundation for the company that now includes eight daily newspapers, including the Los Angeles Times, the Baltimore Sun, and Daily Press.[6] The Tribune Company was publicly traded from 1983 through December 2007, when it was purchased by Samuel Zell.[6]  In late 2008, the Tribune Company filed for bankruptcy.[7] In 2007, the company’s newspapers’ circulation was around 2.7 million copies daily and 3.9 million copies on Sundays.[8]  Circulation in 2007 was lower than in previous years due to discounting on home delivery subscriptions and lower single copy sales.[8]
3. The New York Times Company
   The New York Times Company is a multimedia news and information company that includes newspapers, digital businesses, paper mills, and other investments.  In 2011, the New York Times had the highest market share in print advertising revenues among national newspapers. In addition to the New York Times, the company’s newspaper holdings are comprised of the International Herald Tribune, the Boston Globe, and various other newspapers including 16 regional papers.  The company also owns the websites affiliated with its newspapers, including NYTimes.com.  In 2011, NYTimes.com had approximately 48 million unique visitors per month.[9]

Industry Trends

Trends in the newspaper publishing industry have changed over the past several years, especially in response to shifts in technology. A few of the most significant changes are:

1. The Internet competes with the newspaper industry.
   People are increasingly turning to the Internet as a media outlet, which has taken a toll on the publishing industry.  Consumers no longer want to wait until the weekend or even the next morning to get their news.  New media outlets such as blogs and Twitter also serve as alternate news sources.  As readers increasingly turn to the Internet, so do advertisers, taking publishers’ revenue streams with them. Publishers that successfully adopt the Internet will fare better than those that do not.

2. Newspapers have begun to charge online subscription fees.
   In an effort to recapture revenues lost as readers flee from print to online news sources, some newspapers have begun charging users for some or all of the newspaper’s online content. However, according to an analysis by Bain & Company, 86 percent of U.S. consumers only read free online newspapers.[10]  Furthermore, those who are willing to pay are only willing to spend about one third as much for digital news as they would for print. [10]  The content that readers are most willing to pay to access digitally is local news, followed by special coverage/investigative reporting.[10]

3. Newspapers are cutting content.
   As the publishing industry experiences declining revenue, publishers are increasingly cutting content.  Newspapers are becoming smaller and thinner as publishers no longer can generate the ad revenues necessary to sustain longer issues.  In some cases, newspapers are also cutting the frequency of their issues.[2]

4. Newspaper companies are consolidating.
   Newspapers often experience economies of scale and cut overhead costs through consolidation.  Additionally, the large investments necessary to develop digital publishing technologies have pushed firms to consolidate.[4] Through consolidation, publishers hope to better fend off competitors.

Key Publishing Performance Metrics

The following are performance metrics that managers in the newspaper industry use to benchmark their performance to others in the industry:

1. Revenue per page
2. Cost per page
3. G&A/revenue
4. Subscribership and circulation
5. Renewal rate
6. Market share
7. Number of advertisers
8. Number of pages

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value newspaper publishing companies, as follows:

1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business value is equal to the cost of acquiring its physical assets.  This approach may become increasingly important if the newspaper publishing industry continues to decline and more companies find themselves in liquidation.

2. Income approach to value (capitalization of earnings): This method is most applicable to publishers that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).

3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established publishing companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.

4. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded publishing companies and privately held publishing companies.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following average benchmarking data is based on studies from various newspaper publishing companies:[11]

	2007	2008	2009	2010	2011
Operating Profit (% of Net Sales)	7.7	3.9	3.1	5.9	4.3
Sales/Net Fixed Assets	8.3	8.2	7.4	6.7	5.0
Current Ratio	1.8	1.3	1.4	1.4	1.2
Quick Ratio	1.4	1.1	1.1	1.0	1.0

The above benchmark data show that operating profit as a percent of sales hit a low point during the recession.  The 2011 ratio of 4.3% is well below the 7.7% shown in 2007.  Additionally, sales to fixed assets and current assets to current liabilities have decreased over time as the industry has declined generally.

Before using this benchmark data for specific valuation purposes it should be evaluated for appropriateness.

Industry Organizations and Publications

Some organizations that publish helpful information about the newspaper industry include:

1. Newspaper Association of America: www.naa.org, a professional organization with articles and data related to the newspaper industry
2. National Newspaper Association: www.nnaweb.org, an organization “protecting, promoting and enhancing community newspapers since 1885”[12]

Availability of Publicly Traded Comparable Companies

Several publicly traded publishing companies, by market capitalization, are:[13]

1. News Corp ($58.3 billion)
2. Pearson ($9.7 billion)
3. Gannett Co., Inc. ($4.1 billion)
4. Meredith Corporation ($1.6 billion)
5. The New York Times Company ($1.2 billion)

It should be noted that some of these companies also engage in a variety of other publishing and non-publishing activities and are not exclusively newspaper publishing companies.  Based on a number of publicly traded newspaper publishing companies, the newspaper publishing industry has a price to earnings ratio of 23.5.[14]

Availability of Private Purchase Transactions

In addition to public publishing companies, data regarding privately held newspapers can also provide useful benchmarks when valuing a newspaper publisher.  The size and scope of private publishing companies that have been bought and sold over the past five years varies greatly, both in terms of their sales and the purchase price paid for the companies.

Fulcrum identified 3 private purchases of newspaper publishing companies over the five year period from July 1, 2007 through June 30, 2012.  These transactions show the following ranges:[15]

1. Total deal values ranged from $275,000 to $77 million.

2. Market value of invested capital (MVIC) to net sales ranged from 0.9 to 3.3 times.

3. MVIC to earnings before interest, taxes and depreciation (EBITDA) was only available for one transaction with a ratio of 7.5 times.

This range of market multiples is based on an extremely small sample and is too variant to be useful without further analysis. As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject. Additionally, industry economic conditions vary over time, which can affect publishing companies as investment opportunities.  Specific factors that are unique for each company must be considered.  Some of these factors include the:

1. Competitive environment in the geographic area served by a newspaper
2. Extent of the company’s investment in electronic news publishing
3. History of the publishing company and its newspapers
4. Established relationships with advertisers

Fulcrum Inquiry performs business appraisals for newspaper publishing companies and other businesses.