Would You Put 20% Down Of Your Own Money To Buy A Newspaper?

Philip M. Stone March 25, 2009

The great divide these days between those who need to borrow to buy newspapers and the banks lending the money is the percentage the buyer must put down to gain the bank’s attention. According to a recent survey the banks want 20%+ down, but most buyers prefer around 10%.

The survey by W.B. Grimes & Company of several hundred owners of small newspapers showed that 58% of them are concerned that lack of suitable bank financing and their having limited cash of their own are stopping deals being made, especially since only 36% of the respondents said they were comfortable with putting down as much as 20% on a newspaper buy.

Not that there is that much enthusiasm out there to make a purchase. Only 10% said they were ready to make a purchase whereas 21% indicated they were more likely to be sellers.  But, if ever there is light at the end of the economic tunnel then it seems there will be renewed interest in buying, with another 25% saying they might jump in as the economy improves

But it looks as though that won’t be until 2010, with 63% saying 2009's discretionary income would first go towards developing their existing business. 

And a newspaper property needs to be doing pretty well to be even considered sellable. More than 50% said they require sellers to have a minimum of $500,000 in annual revenues, and, not surprising, positive cash flow.  The most sought after is the weekly – 89% -- whereas interest in daily newspapers or shoppers dropped dramatically to 38%. Only 25% were interested in "alternative or city" weeklies while 13% had an interest in parenting publications and 17% in seniors’ publications.

“My read on these results is that most newspapers publishers clearly recognize the value of making strategic acquisitions,” said Larry Grimes, president of W.B. Grimes, “but with revenues down as much as 20% over the past six months and without much ad sales clarity in the immediate term, publishers find it more prudent to hold their cash and use it for maintaining their own businesses. Keep in mind, a vast majority of those people who answered the survey are smaller daily and weekly owners/publishers. Their papers should rebound strongly as the economy improves.”  

And Grimes told ftm in an email exchange that a lack of cash for 20% down payments has turned the market cold. “Clearly most felt they could afford a 10% down payment with 20% a stretch, but in a banking environment requiring a minimum of 20% (and over the past year as much as 40%-50% down) that does tend to put many prospective buyers on the sidelines.

“I’m one to believe having some “skin” in the game makes great sense when it comes to securing a loan.  At the same time, bank lending at 2.5-4 times cash flow has been ridiculous and has done more to compress multiples than the weakened economy itself.  If you feel a target newspaper is fairly valued at 7X cash flow and your bank is only prepared to lend at 3X, that is a lot of cash you need to put up to make a deal—far more cash than makes any rational sense.”

But assuming somehow the financing could be put in place, what is the strategic thinking? By far the most important consideration – 62% -- is that the deal would make sense with their existing newspaper holdings. Only 15% indicated a desire to move into new markets. 

Grimes said it is important to note in his survey that 75% of the respondents were owner/publishers. Of the 25% who work for a group, 42% indicated they have the okay to consider acquisitions on a case by case basis, yet only 3% indicated they were being encouraged to do. And 40% said they had no intention in considering acquisitions at this time.

The reason why the weeklies and small dailies remain in demand if the financing is available is because financially they are doing better than their metropolitan cousins. Recent data compiled by the National Newspaper Association (NNA) and the Suburban Newspapers Association (SNA) revealed that whilst the newspaper industry as a whole averaged a 21% advertising revenue fall in Q4, 2008, for the community papers the loss was far less at 6.6%. And for the year the overall decline is estimated at 3.6% for community papers versus double digit decreases for the industry in general.

That doesn’t surprise SNA President Nancy Lane. “Community papers are affected by the current economic downturn, but they are not in a crisis; they are not experiencing massive layoffs, and they are investing in the future," she said.

And one such community newspaper, The Gulf Breeze News in Gulf Breeze, Florida describes the current situation. “We're all feeling the pinch," co-publisher Vici Papajohn said. “Gulf Breeze News is just like any other business enterprise in the city. We depend on our fellow residents just as they depend on us. We don't have the support of a corporate office like some papers do, but nor do we have their overhead.

“Other papers in the area have raised their subscription and single copy prices by 40% or more at a time when most people are struggling to just make ends meet. We've elected to maintain our affordable prices for advertisers, subscribers and single copy sales because we're confident things will turn around with the economy."

So the bottom end of the market is doing reasonably well but even there buying properties is difficult because of stringent bank loan rules requiring at least 20% down and a reluctance to accept anywhere near 7 times earnings as a newspaper’s value. The big questions now are whether the banks will loosen up their lending policies once they’re rid of their toxic debt, and even if they do, will we return to the  10% down days and what earnings multiples will they apply to newspapers in deciding whether or not to grant the loan?

It’s uncharted territory.