Wanted: Newspaper properties in second and third tier markets

Newspaper Mergers & Acquisition experts know that the most profitable newspapers are generally not in large metropolitan markets where competition for advertising is stiff and the cost of editorial content high. Smaller markets tend to have much wider profit margins. Renée LaBran, partner at Santa Monica, California based Rustic Canyon Partners, which recently invested in the Rumbo newspaper network in Texas, tells Portada® that in the top ten DMAs (Designated Market Areas) many advertisers demand zoned distribution of newspapers, which can be very costly. The fact that Rumbo does not operate in one of the larger DMAs was a big part of Rustic Canyon's decision to invest. “Metropolitan newspapers tend to have lower operating margins than community dailies”, says Phillip W. Murray, senior VP at Dirks, Van Essen Murray, a merger and acquisition firm in the U.S. newspaper industry.

A well run community newspaper can have operating margins of between 20% and 30%. Publicly traded companies, like Gannett, McClatchy or Lee Corp., which have a number of newspapers operating in smaller markets, have higher sales multiples (Market Capitalization/Annual Sales) than newspaper operators with papers in larger markets (e.g. New York Times Corp.). Gannett's stock market multiple lies around 2.5 times sales and has a 29% operating margin. Lee Corp.'s stock market multiple lies at 2.6 times sales. Lee has an operating margin of 21% and annual sales growth of 5%. The New York Times trades at 1.4 times sales and has an operating margin of close to 20%. The New York Times' year on year revenue growth is approximately 0.5%. The largest U.S. newspaper operator has annual revenue growth of approximately 3.5%.

Private transactions for smaller market newspapers can have multiples as high as 3 to 4 times sales. Private equity investors entering the Hispanic market hope to get even higher multiples. “In five years, Rumbo should be growing at an annual rate of 20%,” says LaBran.

No precedents
In the Hispanic newspaper industry there are very few examples of high multiple newspaper sales transactions. This could be because transaction prices are often not disclosed or because the newspaper companies being sold are not very profitable. This was the case when the Lozano family sold 50% of Los Angeles based La Opinion to the Times Mirror Group in 1990. In 2003, New York's El Diario/La Prensa was sold for US $19.9 million to a private investment group led by Clarity Partners LP, BMO Halyard Partners, ACON Investments and Knight Paton Media. This figure implies a multiple of just over 1 times sales.

The figures for other transactions like the Washington Post Company's 2003 purchase of El Tiempo Latino and The Atlanta Journal Constitution's 2003 purchase of Atlanta's El Mundo Hispanico were not disclosed.

Young and expanding audience
While general market newspapers are losing advertisers and struggling to increase circulation, Spanish-language papers face a very different sort of challenge, namely serving audiences that are young and expanding. According to Renée LaBran, partner at Rustic Canyon Ventures, this was one of the main reasons that Rustic Canyon and Houston based Pinto Partners led a US $18 million investment in the Rumbo newspaper network. Rustic Canyon was especially attracted by Rumbo's scalability, or its ability to leverage content, infrastructure and distribution network in other markets.

What private equity houses and VC's expect from their investments

Metrics

Comment

Note

Expected ROI

30% or more

For media investments the expected ROI is 30%. For technology investments it is higher.

Valuation when exiting investment

4-5 times sales

The expected growth rate of the company 3-5 years after the initial investment is 20%+, making the sales ratio more attractive.

Minimum investment

US $5-$10 million

Most investments need to be at least that size to be relevant to the permance of the funds they come from.

Mininum size of companies

Companies need revenues of approx. US $10 million

Difficult to find in the Hispanic market

Source: Portada® and industry sources

…and what looks good

Media

Subsector

Note

Radio

Second and third tier markets (Local content)

Large markets are too competitive

TV

Second and third tier markets (Local content)

Large markets are too competitive

Newspapers

Particularly in second and third tier markets

Like to see scalable infrastructure and the ability to offer reach to national advertisers

Internet

High growth sector

Research needed to better understand Hispanic Internet users

Direct Mail

Hispanics are underexposed

Lines of print advertising delivery are blurring

Yellow Pages publishing

Looking for scalable platform and reach for national advertisers

Many small books are poorly run. Revenues are often in the form of barter

Information Services

Provide demographic data about Hispanic consumers and businesses

High demand for quality data and research


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Editorial Staff @portada_online

Portada Staff

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