As readers may have long suspected, if you catch me trying to add some
anecdotal
discussion to a thread about some particular industry, it's usually not a good sign. I rarely get invited to visit businesses that are already doing well.
So for what it’s worth, it happens that I became familiar with some newspapers not too long ago -- about a dozen papers, pretty much all weeklies fueled by ads and having few or minimal paying subscribers. These are pretty much of the type we're reading about with Berkshire. Now let's emphasize that my observations are just anecdotal to a very small sample -- and I'm not suggesting that these are necessarily Berkshire-quality equivalents. But I'll continue:
All—and I’m going to aggregate them here for anonymity--were privately owned (including by private equity) in combined groups, with each of the holding companies’ owners having reputations as being savvy operators in this segment.
Collectively the dozen had combined revenue of a bit under $10 million for this most recent year, with pre-tax earnings (cash-basis, for example omitting depreciation) of under $500k. That’s for the twelve combined.
Their markets range from urban neighborhoods to Tractor Supply Co territory. The urban papers in the group each targeted very specific neighborhoods – not entire cities. Urban dwellers know what this means. In cities like Boston, or that other metropolis with the world’s most capable mayor, residents of some neighborhoods have a certain sense of community and interest in local happenings, and have certain demographics. These neighborhoods are sometimes the size of small cities or good-sized towns - populations typically 25,000 to 100,000 - with papers tailored to (and selling advertising to) their residents. Anyway, our twelve ran the gamut.
Now before we go further and just for some historical perspective, we’ll recall that a decade ago the typical newspaper generated revenue from three sources– subscriptions, classified ads, and display ads – often in more or less equal measure. These days, and particularly in this category, the lion’s share of revenue is from display ads.
Operating leverage, or lack of…
At the risk of sounding too simplistic, one of the first things we always want to do in analyzing any business is try to break out expenses between what we consider ‘fixed’ and ‘variable’. These companies’ cost structures – by their managements’ own estimations--were roughly two-thirds ‘fixed’ and one-third ‘variable’. The higher the proportion of ‘fixed’ versus ‘variable’, the higher the leverage – up and down – with revenue swings. As revenues decline, managements will of course take defensive measures beyond that natural ‘variable’ expense reduction (fixed expenses can be, and were, also cut) but a high proportion of fixed costs usually makes for tough going in a downward trend.
And this was the case here. Our group-- pretty much across the board--experienced about a 10% decline in revenue from the prior year, resulting in a sobering 50% drop in pre-tax income, again pretty much across the board for those papers. A million dollar or so drop in revenue was accompanied by only about a half a million drop in expenses, with half of the shortfall flowing through to the bottom line.
Fixed and variable costs
Now here’s an interesting tidbit: none of these newspapers actually printed their own papers. All outsourced the actual printing to a small (and declining) number of independent printers. There was not much loyalty to the printers, either. Within prescribed parameters it was pretty much a matter of price, with no long-term contracts. All were regularly pricing alternative sources for printing. Some papers used printers quite some distance away. Digressing, I’ve had no exposure to these printers, but just on the dynamics here we might suspect that generic newspaper production printing might even be a worse business than newspapers -- at least until the second-to-last participant folds. Anyway, despite assumptions we see kicking around, printing is one of the papers’ ‘variable’ costs – variable at least to total pages printed.
Another significant and somewhat variable cost is distribution. This can range (from recollection) from maybe 15 cents per copy on the high end, mailed, to perhaps 8 cents where drivers hand-deliver to convenience stores, dispenser boxes, and other outlets. We’ll remember most of these papers these days are ‘free’, but those distribution costs are of course real. Not to be obvious but that distribution – the demographics of the people getting those papers – is critical for signing up advertisers.
Overall, the big expense is of course staff payroll. While some of these papers had locally known writers or critics on staff with some public following, collectively they were given almost no value. Talented editors and content providers are, as one owner noted, plentiful and inexpensive. The average pay on the editorial staff of these papers might have worked out to fast-food wage levels. Maybe worse. We’re mindful of Buffett’s seemingly cold response decades ago at the Buffalo News when a staffer asked about the possibility of more compensation. Same sort of thing here. When owners looked at possible acquisition, there was minimal value assigned to this perhaps easily replicated group.
Advertising
On the other hand, the handful top advertising sales producers were golden. Their retention was considered critical in any potential acquisition, and their pay was about double their editorial counterparts. They sold ads across all papers in an owner’s portfolio. Looking at some of the typical larger papers in the group, and the salaries and productivity of top producers, pay levels in recent years amounted to maybe 20% of ad revenue generated. This – the success of these people – is pretty much the whole story.
Here’s another interesting aside – a minor note. There’s another remora-type business that’s on the edges. Remember those companies a decade ago that bought up excess long-distance capacity from carriers and sold it as phone-cards at the retail level? Those are long gone (and yes, I was invited to visit one of those when that business model started unraveling), but there is a newspaper equivalent--companies that buy up unsold ad capacity on the cheap, at the last minute, and re-sell it. I would almost ignore this as insignificant, except that the very existence of these folks perhaps means that we can’t just scan a paper and make a too-superficial estimate as to a paper’s health. But this is a foonote.
The display advertiser trends are also interesting. Especially in more urban areas, ads are increasingly placed by ‘institutional’ advertisers – medical clinics and centers, colleges, and such -- that are perhaps less price sensitive than old-school retailers. Trends like that vary, but are perhaps worth noticing.
Multiples
So now let’s get to the bottom line-what we all want to know: how much are these businesses selling for? Well, a half-dozen of that group have been sold since I looked into them. The purchase price looks like it worked out to be about 3 times pre-tax earnings (again, cash basis). That’s what the sellers were willing to take to exit while they still had something to sell, and what the buyers – already in the business with existing portfolios of papers and wanting to leverage up advertising sales – were willing to pay.
That’s three times this past year’s pre-tax. For optimists, maybe one-and-a-half times the prior year’s pre-tax, if someone has a plan to get back there. Or as sellers might be seeing it, some high multiple of next year’s trend earnings. To the point, the base for that multiple is a moving target. In any case, it’s a leveraged gamble of sorts, but it is also an in-the-trenches tough haul. It’s become a scrappy business that requires a lot of effort by a lot of people to eke out a living.
For anybody already in the business and committed to surviving in it, acquisition and consolidation would seem to be critical for continued survival. For some entrepreneur who can figure out how to revive revenues in this segment, this might be an interesting opportunity to create a bit of wealth. But a lot of smart people have tried and given up, and without some magic formula this business seems pretty challenging, if not potentially consuming. Hopefully the Berkshire newspaper folks know some magic.
discussion to a thread about some particular industry, it's usually not a good sign. I rarely get invited to visit businesses that are already doing well.
So for what it’s worth, it happens that I became familiar with some newspapers not too long ago -- about a dozen papers, pretty much all weeklies fueled by ads and having few or minimal paying subscribers. These are pretty much of the type we're reading about with Berkshire. Now let's emphasize that my observations are just anecdotal to a very small sample -- and I'm not suggesting that these are necessarily Berkshire-quality equivalents. But I'll continue:
All—and I’m going to aggregate them here for anonymity--were privately owned (including by private equity) in combined groups, with each of the holding companies’ owners having reputations as being savvy operators in this segment.
Collectively the dozen had combined revenue of a bit under $10 million for this most recent year, with pre-tax earnings (cash-basis, for example omitting depreciation) of under $500k. That’s for the twelve combined.
Their markets range from urban neighborhoods to Tractor Supply Co territory. The urban papers in the group each targeted very specific neighborhoods – not entire cities. Urban dwellers know what this means. In cities like Boston, or that other metropolis with the world’s most capable mayor, residents of some neighborhoods have a certain sense of community and interest in local happenings, and have certain demographics. These neighborhoods are sometimes the size of small cities or good-sized towns - populations typically 25,000 to 100,000 - with papers tailored to (and selling advertising to) their residents. Anyway, our twelve ran the gamut.
Now before we go further and just for some historical perspective, we’ll recall that a decade ago the typical newspaper generated revenue from three sources– subscriptions, classified ads, and display ads – often in more or less equal measure. These days, and particularly in this category, the lion’s share of revenue is from display ads.
Operating leverage, or lack of…
At the risk of sounding too simplistic, one of the first things we always want to do in analyzing any business is try to break out expenses between what we consider ‘fixed’ and ‘variable’. These companies’ cost structures – by their managements’ own estimations--were roughly two-thirds ‘fixed’ and one-third ‘variable’. The higher the proportion of ‘fixed’ versus ‘variable’, the higher the leverage – up and down – with revenue swings. As revenues decline, managements will of course take defensive measures beyond that natural ‘variable’ expense reduction (fixed expenses can be, and were, also cut) but a high proportion of fixed costs usually makes for tough going in a downward trend.
And this was the case here. Our group-- pretty much across the board--experienced about a 10% decline in revenue from the prior year, resulting in a sobering 50% drop in pre-tax income, again pretty much across the board for those papers. A million dollar or so drop in revenue was accompanied by only about a half a million drop in expenses, with half of the shortfall flowing through to the bottom line.
Fixed and variable costs
Now here’s an interesting tidbit: none of these newspapers actually printed their own papers. All outsourced the actual printing to a small (and declining) number of independent printers. There was not much loyalty to the printers, either. Within prescribed parameters it was pretty much a matter of price, with no long-term contracts. All were regularly pricing alternative sources for printing. Some papers used printers quite some distance away. Digressing, I’ve had no exposure to these printers, but just on the dynamics here we might suspect that generic newspaper production printing might even be a worse business than newspapers -- at least until the second-to-last participant folds. Anyway, despite assumptions we see kicking around, printing is one of the papers’ ‘variable’ costs – variable at least to total pages printed.
Another significant and somewhat variable cost is distribution. This can range (from recollection) from maybe 15 cents per copy on the high end, mailed, to perhaps 8 cents where drivers hand-deliver to convenience stores, dispenser boxes, and other outlets. We’ll remember most of these papers these days are ‘free’, but those distribution costs are of course real. Not to be obvious but that distribution – the demographics of the people getting those papers – is critical for signing up advertisers.
Overall, the big expense is of course staff payroll. While some of these papers had locally known writers or critics on staff with some public following, collectively they were given almost no value. Talented editors and content providers are, as one owner noted, plentiful and inexpensive. The average pay on the editorial staff of these papers might have worked out to fast-food wage levels. Maybe worse. We’re mindful of Buffett’s seemingly cold response decades ago at the Buffalo News when a staffer asked about the possibility of more compensation. Same sort of thing here. When owners looked at possible acquisition, there was minimal value assigned to this perhaps easily replicated group.
Advertising
On the other hand, the handful top advertising sales producers were golden. Their retention was considered critical in any potential acquisition, and their pay was about double their editorial counterparts. They sold ads across all papers in an owner’s portfolio. Looking at some of the typical larger papers in the group, and the salaries and productivity of top producers, pay levels in recent years amounted to maybe 20% of ad revenue generated. This – the success of these people – is pretty much the whole story.
Here’s another interesting aside – a minor note. There’s another remora-type business that’s on the edges. Remember those companies a decade ago that bought up excess long-distance capacity from carriers and sold it as phone-cards at the retail level? Those are long gone (and yes, I was invited to visit one of those when that business model started unraveling), but there is a newspaper equivalent--companies that buy up unsold ad capacity on the cheap, at the last minute, and re-sell it. I would almost ignore this as insignificant, except that the very existence of these folks perhaps means that we can’t just scan a paper and make a too-superficial estimate as to a paper’s health. But this is a foonote.
The display advertiser trends are also interesting. Especially in more urban areas, ads are increasingly placed by ‘institutional’ advertisers – medical clinics and centers, colleges, and such -- that are perhaps less price sensitive than old-school retailers. Trends like that vary, but are perhaps worth noticing.
Multiples
So now let’s get to the bottom line-what we all want to know: how much are these businesses selling for? Well, a half-dozen of that group have been sold since I looked into them. The purchase price looks like it worked out to be about 3 times pre-tax earnings (again, cash basis). That’s what the sellers were willing to take to exit while they still had something to sell, and what the buyers – already in the business with existing portfolios of papers and wanting to leverage up advertising sales – were willing to pay.
That’s three times this past year’s pre-tax. For optimists, maybe one-and-a-half times the prior year’s pre-tax, if someone has a plan to get back there. Or as sellers might be seeing it, some high multiple of next year’s trend earnings. To the point, the base for that multiple is a moving target. In any case, it’s a leveraged gamble of sorts, but it is also an in-the-trenches tough haul. It’s become a scrappy business that requires a lot of effort by a lot of people to eke out a living.
For anybody already in the business and committed to surviving in it, acquisition and consolidation would seem to be critical for continued survival. For some entrepreneur who can figure out how to revive revenues in this segment, this might be an interesting opportunity to create a bit of wealth. But a lot of smart people have tried and given up, and without some magic formula this business seems pretty challenging, if not potentially consuming. Hopefully the Berkshire newspaper folks know some magic.
