Minneapolis – Big-city newspapers, once held in high regard on Wall Street for their dependable earnings and advertising clout, have never looked so cheap.
On Tuesday, The McClatchy Co. agreed to unload the Star Tribune for $530 million – less than half the $1.2 billion it paid for the newspaper eight years ago. A tax break of $160 million resulting from the sale makes the deal worth $690 million to McClatchy. But as a multiple of cash flow – a common financial benchmark – the bid was substantially less than the amounts paid for other newspapers this year, according to investment analysts.
In a Wednesday report titled “Minneapolis valuation a bearish signal for the newspaper industry,” Goldman Sachs said Avista Capital Partners is paying just 7.4 times the Star Tribune’s cash flow – below the current newspaper industry’s average valuation of 8.7 times cash flow.Including the tax benefit, the multiple rises to 9.6.
Cash flow is the amount of cash generated from operating revenues and investments, for example, minus the amount of cash consumed by operating and other expenses. Most newspaper deals over the past year have been priced at between 10 to 12 times cash flow, said James Peters, advertising and publishing analyst at Standard & Poor’s in New York. In 1998, McClatchy Co. paid 16 times cash flow when it purchased Cowles Media Co., the former parent company of the Star Tribune.
McClatchy shares closed down 1 cent Wednesday at $43.06. The stock rose 1.9 percent Tuesday, although the deal was announced after the market had closed.
The low price fetched for the Star Tribune will set a new benchmark for newspaper valuations across the industry, and could force other newspaper companies to sell at prices considered unthinkable just a few years ago, media analysts said Wednesday.
“This deal confirms what many of us already know – that newspapers have lost esteem with investors,” said Thomas Russo, a partner and portfolio manager with Gardner, Russo & Gardner, a Lancaster, Pa.-based money management firm that owns more than 2 million shares of McClatchy stock.
