The newspaper industry is supposed to be dying. The average reader is aging, as the younger generation prefers alternate content distributions, such as TV, blogs, podcasts and satellite radio. And the advertising base is being usurped by online classifieds sites, such as Craigslist and Monster.com.
But many private equity firms believe that reports of the newspaper industry’s death have been greatly exaggerated. There have been about one dozen buyouts of newspaper publishers since the beginning of 2004, including deals for American Community Newspapers (bought by Wachovia Capital Associates and Spire Capital); Local Press Ltd. (3i Group); and Freedom Communications Inc. (Blackstone Group and Providence Equity Partners).
Just last week, Veronis Suhler Stevenson agreed to buy a German paper, Berliner Verlag, while Wachovia Capital Markets soon will begin shopping The Boston Herald and its affiliated group of suburban dailies and weeklies.
So why the disconnect between popular perception and private equity interest? The answer lies partly in the availability of assets.
For most folks, the newspaper industry’s success or failure is predicated on the fortunes of big-city stalwarts like the New York Times, Los Angeles Times and Washington Post. These are the market leaders, and their revenue trend-lines radiate outwards. Private equity professionals, however, often focus on community, alternative and non-English language papers. Not only are such assets more readily available for purchase, but also they are less likely to lose help-wanted ads to online sites.
“Traditional papers in big markets have not been of much interest to private equity firms because not many are for sale, and because they fit into a slower growth category,” says Phil Thompson, a managing director with Alta Communications. “Where you do see interest, though, is on the community newspaper side, because they’ve got great margins and still play an important role in their local communities.”
Andy Armstrong, a co-founder of Spire Capital, adds: “There are lots of ways to get the national and international content in big metro newspapers, but nobody else is telling you what happened on the local soccer field or the local school board or the local church. … Our papers sit on living room tables for a week, because the content doesn’t go stale.”
Get Your Boston Herald
Perhaps the best example of this private equity outlook is Herald Media Inc., the Boston Herald publisher that in early 2001 acquired more than 100 local community papers from Fidelity Investments. The $150 million deal was partially financed by about $60 million from Audax Group, BMO Halyard Partners and Weston Presidio and opened Herald publisher Pat Purcell to critics, who argued that Fidelity had good reason for badly wanting to dump the papers. They also contended that perhaps Purcell’s real motivation was to replace some unionized Boston Herald reporters and editors with non-unionized community paper staffers.
Late last year, Audax, Halyard and Weston Presidio recouped about 90% of their investment via a dividend recapitalization. By last month, they told Purcell that it was time for them to exit, primarily because it’s bad business for private equity firms to hold on to portfolio companies for more than five years. Herald Media retained Wachovia Capital Markets to help sell the private equity-owned piece, although Wachovia also is prepared to gauge interest in a sale of the entire company.
“The real question is whether or not the economics would permit a piecemeal sale, or if it needs to be done as one giant package,” says a source close to the company. “It’s ironic, but a lot of buyers – particularly private equity firms – would rather take the community papers and leave the Herald for someone else. … I’d suggest that [Purcell] understood the future of newspapers better than people gave him credit for in 2001.”
Christie Wright is running the Herald Media process for Wachovia, but declined to comment for this story.
The overall newspaper market saw total newspaper spending rise for the third consecutive year in 2004, according to a joint report from Veronis Suhler Stevenson and PQ Media. Newspaper revenue – including paid circulation and print advertising – rose 3.1% to $63.53 billion, and that does not include online advertising fees.
“This is a mature business with some top-line growth and a lot of cash-flow,” says Jim Rutherford, a managing director of private equity at Veronis Suhler. “Lenders obviously appreciate that, which helps private equity firms get deals done.”
Rutherford adds that he has seen a steady level of interest in the space over the past several years, and that he expects it to remain.