But why would anyone want to buy them? The answer is simple: Old Media isn’t a dinosaur yet. In fact, there’s big money to be made before the asteroid hits. Why else would savvy businessmen like General Electric’s former chairman Jack Welch and entertainment mogul David Geffen be kicking the tires of, respectively, The Boston Globe and the Los Angeles Times? While this week’s numbers, compiled by the Audit Bureau of Circulations, may have spooked some, the reality is that newspaper profitability remains high. Cash-flow margins—a good measure of the self-financing capabilities and profitability of a business—are still high. The New York Times Co., which posted a 3.5 percent slump in circulation, had a 15 percent margin last year, according to JPMorgan Chase; The Tribune Co., which owns the L.A. Times, had 20 percent across its various papers, and Knight Ridder, which was sold to McClatchy Co. earlier this year, had a 2005 margin of 19.9 percent. Those margins are higher than those of many big Fortune 500 firms, including IBM. “I think there’s this perception that the industry is somehow losing money,” says John Kimball, chief marketing officer at the Newspaper Association of America. “Believe me, we are not losing money.”
Nonetheless, Wall Street has largely discounted the business, both because of the circulation drops and the fact that profits—while still high—have been trending downward. The rise of competitive online news sources hasn’t helped, with advertisers looking to divert more of their dollars to the Web. Even though many newspapers have been trying to keeps ad dollars in-house with their own Web sites, those revenues are still nowhere near print ad revenues. JPMorgan analyst Fred Searby notes that online ad revenue, while growing, only represents an average of 6 percent of total ad sales. There’s no telling when online will be able to turn the same kind of profits that print does. For now, it’s not enough to replace it.
The Newspaper Industry Association’s Kimball counters that what Wall Street sees as the end of the road, he sees as a transition period—one that can’t be completely measured by circulation. “I’m not trying to change the measure here, but how many newspapers are printed and distributed doesn’t mean anything,” he says. On average across the nation, newspaper readership is two and a half times paid circulation, something that isn’t reflected in the ABC numbers. Kimball says advertisers and Wall Street would do well to pay more attention to readership and less to circulation. But JPMorgan’s Searby says that a new metric wouldn’t alter the way Wall Street looks at the industry’s staying power. As for the money, Searby says that many newspapers are indeed cash cows, but they’re deteriorating cash cows. “I hate to say it, but the industry is in slow-train-wreck mode,” he says.
The disconnect between Wall Street’s perception and the industry’s profitability has created opportunity for investors looking to take newspapers private. The smart money in private equity looks for companies where the product sentiment is negative but cash flow is strong: these investors take the companies out of the public markets until sentiment is strong enough to launch an IPO. Pressure from shareholders to boost the stock price has made such sales all the more attractive to the big publicly traded newspaper companies: Tribune is exploring a sale of its papers, following a boardroom confrontation with the Chandler family of Los Angeles, former owners of the Los Angeles Times and Newsday in New York and currently Tribune’s second-largest shareholders. Tribune started by taking bids from private equity firms for the entire company, but found them to be too low; this week, it decided to take bids on individual assets as opposed to the entire company. That has opened up opportunities for individual investors like Geffen, L.A. real-estate mogul Eli Broad, and supermarket billionaire Ron Burkle to take a crack at snatching up the L.A. Times. Copley Press, which owns The San Diego Union-Tribune, also announced this week that it is exploring the possible sale of seven newspapers in Ohio and Illinois. And Welch is exploring ways to buy The Boston Globe from New York Times Co., even though it isn’t up for sale.
Gregory Favre, a fellow in journalism values at the Poynter Institute, says that no matter who owns what, it would behoove the newspaper industry to keep the communities they serve in mind as much as they do the bottom line. “There’s no question that we have enormous challenges ahead,” he says. “What bothers me is that newspapers have put a much larger premium on satisfying Wall Street than on the role they play in their communities.” That’s a role that shouldn’t bottom out because of bottom lines.
