A newspaper buying spree: despite their declining value and much-publicized woes, papers are attracting interest.

Morton, John

In the not so distant past, the more valuable newspapers became, the more eager sellers and buyers became to do deals. Today newspapers are far less valuable--by half or more--yet sellers and buyers are once again finding each other in great numbers.

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When the future of newspapers seemed bright, with apparently never-ending cash flow growth and steadily increasing values ahead of them, acquiring the print products seemed like a no-brainer. Banks bought into this scenario, and acquisition money was easy to borrow.

Then came the Internet. When broadband coverage of households began to surge in 2004, advertising began to drift away from newspapers. In just four years, starting in 2006, the newspaper industry's advertising revenue dropped more than 50 percent, and is still eroding, although the rate of decline has slowed thanks to easy comparisons.

The drying up of the revenue stream that historically contributed three-quarters of newspapers' revenue (it's down to about 60 percent now) had a grievous impact on operating profit margins, dropping them from over 20 percent in the early-to mid-2000s to around 10 percent today. (Those figures are based on data from publicly reporting companies as a proxy for the industry.) Not surprisingly, banks are no longer so eager to finance newspaper purchases.

So where is the money coming from to fund the current wave of acquisitions? And what do the buyers see that banks apparently do not? Well, it is worth pointing out that, at the right acquisition price, a 10 percent operating profit margin, or even a couple of points lower, is not unattractive. Some industries don't hope to achieve 8 to 10 percent margins in the best of times, and here are newspapers reaping them in what for them has been the worst of times.

Back when newspaper margins were soaring, acquisition prices were also high as measured by multiples of revenue or cash profit (so-called EBITDA, or earnings before interest, tax, depreciation and amortization) or average daily circulation unit. For example, a newspaper's sales price back then might be equal to one-and-a-half to two times its annual revenue (or 13 to 15 times its annual cash profit), or $1,000 to $1,500 per unit of average daily circulation--a week's total circulation divided by publishing days. These were typical ranges of the multiples back then, although some individual sales could be higher or lower.

Now that most newspaper profits are down by half or more, it is understandable that their valuations are likewise down, as are the multiples of revenue, cash profit and circulation when they are sold. The New York Times Co. recently sold its Regional Media Group of 14 relatively small dailies and two weeklies for $143 million, which is just over half the group's annual revenue and $368 per average daily circulation unit.

So who's buying and who's putting up the money? The Times' papers were acquired by Halifax Media Holdings, a company formed in 2010 by Stephens Media Partners and two private equity companies to acquire the Daytona Beach News-Journal. Stephens Capital Partners is part of Stephens Inc., a large financial firm based in Little Rock that was one of the early non-newspaper investors in the newspaper business, having taken over the old Donrey newspaper chain in 1993. Many of the recent newspaper acquisitions--the San Diego Union-Tribune, the Chicago Sun-Times, Minneapolis' Star Tribune, among others--involved private equity investors.

Late last year, Warren Buffett's Berkshire Hathaway bought the Omaha World-Herald Co., which, in addition to its namesake paper, included six small dailies in Nebraska and Iowa. The price was $150 million, plus the assumption of $50 million in debt. This despite the legendary investor's earlier assertion that newspapers were not attractive investments in the digital era and that he wouldn't buy most of them "at any price." Indeed, the Omaha deal was a bit of an outlier among current transactions, since the price amounted to slightly over $1,000 per daily circulation unit and, in Buffett's words, "certainly is not a bargain." But, he noted, the World-Herald is solidly profitable. And, of course, it is Buffett's hometown paper.

What worries me about some of the recent acquisitions (not Buffett's) is that if newspapers fail to hold their own and their margins continue to decline, these nontraditional owners could start slashing costs in a misguided attempt to make their investments pay off That's a truly bad idea. The principal reason the new owners bought the papers is the lingering value of their strong newsgathering franchises, still the most dominant in every market despite rampant layoffs and downsizing, and still the most crucial asset when it comes to seeking customers online and on mobile devices.

Lose that and there's nothing left.

John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.