On Monday, Boston greeting card mini-mogul Aaron Kushner, along with a group of investors, announced the acquisition of the remaining assets of Freedom Communications, whose flagship media property is the Orange County Register.
The price remains unknown. As does the financing on the deal. And in Boston, they're even asking out loud whether this means it's game over for Kusnher's effort to buy the Boston Globe from the New York Times. His rumored bid was $200 million, which seems pretty low. The New York Times Company's former CEO, Janet Robinson, departed late last year with a $23-million severance package in tow. She didn't want to sell the Globe. But it's entirely possible that the NYT Co. now does.
The Boston Herald spoke with an academic and former newspaper editor to get his take:
“It would seem to me that the financing that would be necessary to complete the purchase of the Orange County Register would stretch almost any investor, certainly someone in his position, to the point where the ability to acquire The Boston Globe would be difficult,” said Tom Fiedler, dean of Boston University’s College of Communication and former executive editor of the Miami Herald.
Kushner's agreement to buy Freedom is going to wind up being a deal that follows two bankruptcies wrapped up in two private-equity plays. That's how ugly things have been financially for his co-investors and his new acquisition, in recent years.
I'll break it down:
•Freedom declared bankruptcy in 2009. It was a fairly quick trip through Chapter 11, with the company exiting by April 2010. Two private equity firms, including the Blackstone Group, owned 40 percent of the company and basically saw their share wiped out, with ownership assumed post-Chapter 11 by a group of firms that specialize in investing in distressed debt. Since then, Freedom has basically been selling itself for parts, starting with a $385-million deal for its broadcast properties last year, culminating in the deal with Kushner's group this week.
•Chris Harte, one of the investors in 2100 Trust, the investor group formed by Kushner to buy the Boston Globe, was involved with a private-equity deal to buy the Minneapolis Star Tribune in 2006. That deal, amounting to $530 million, was completely wiped out by bankruptcy in 2009. Once again, distressed-debt firms swept in to take over the company. Interestingly, one of the firms, Angelo & Gordon, was involved in both the Freedom bankruptcy and the Star Tribune bankruptcy (distressed newspaper debt is its forte).
What we have now is a third private equity deal, and it's safe to assume that 2100 Trust isn't bringing all-cash to the table. This is a leveraged acquisition.
So what about the purchase price? It's possible to do some rough calculations to attempt to figure out the number.
Last year, the entire newspaper group was valued at a reported $350 million, while the T.V. stations were said to be worth $400 million. That's $750 million, a far cry from the $1 billion offered for Freedom back in 1985, when its libertarian streak was more vigorous. That would be almost $2 billion today, if all we did was apply the rate of inflation.
The stations ultimately sold for $15 million less than $400 million. Newspapers are supposed to be in trouble, so you might assume that the speculated $350-million price would also be lower. However, Warren Buffett has been buying newspapers of late, and all on his own he may be creating a small bubble. So let's stick with the $350 million.
The deal sizes of the Freedom newspaper sales that came before the OC Register sale haven't been disclosed, so we really don't have any hard and fast valuations to work with. But we can make some reasonably educated guesses.
To get to the value of the OC Register and the six additional papers that came with it, we can follow some math recommended by Alan Mutter, a former newspaper executive who regularly comments on the industry. Multiply each daily subscriber by $300 (you can also go by weekend, and there's an argument that Sunday subscribers are where the real value is, but I'm trying to keep this relatively simple).
Freedom lists the daily and Sunday subscriber totals for all the papers that were included in the OCR deal, so we can get a decent working set of valuations.* Here goes (I'm rounding up the totals):
•Appeal-Democrat (CA) 16,346 x $300 = $4.9 million
•Daily Press (CA) 21,246 x $300 = $6.4 million
•Desert Dispatch (CA) 3,259 x $300 = $978,000 (let's call it $1 million)
•Porterville Recorder (CA) 8,100 x $300 = $2.4 million
•The OC Register (CA) 236,770 x $300 = $71 million
•Yuma Sun (AZ) 17,961 x $300 = $5.4 million
•The Gazette (CO) 81,388 x $300 = $24.4 million
Adding it all up gives us $115.5 million. The obvious question is, "Is the OCR only worth $71 million?" After all, San Diego U-T owner Doug Manchester bought his paper from Platinum Equity, a private-equity group, for $110 million. Its circulation is lower than the OCR, at something like 220,000, as of last year. Multiply that by $300 and you get $65.8 million. Call it $70 million and subtract it from $110 million and you end up with $40 million. So it that the premium that a Southern California paper commands, over Mutter's basic math?
Let's say it is and raise the OCR price to $111 million. That takes the 2100 Trust deal to around $156 million, and implies that all the other newspaper deals were worth just under $200 million. I can live with that $156 million number, which it should be noted is well below what Kushner was rumored to be offering for the Globe: $200 million.
For comparison, in 2006 the Star Trib sold for $530 million (current daily circulation is 300,330, valuing the paper at $90 million using Mutter Math; in 2006, however, circulation was only 363,000).
Now we can try to figure out how much 2100 Trust is ponying up in cash and how much of the deal in leverage, or borrowed money. When it came out of bankruptcy in 2009, Freedom was anticipating an $11-million profit this year. You could multiply that by 10 — 10 times profit, even if it's purely a fantasy profit — and come within striking distance of $115.5 million. Add the U-T $40 million premium, however, and its gets farther away. (By the way, Manchester was in talks to buy the OC Register earlier this year.)
But Freedom's expected profit was for everything, including the T.V. stations and newspapers. Subtract the broadcast properties — which we know went for $385 million — and focus on just the newspapers and you have to conclude that 2100 Trust figures there's a lot of untapped value in the newspapers it just bought. Skeptics, such as Harvard Business Review's Justin Fox, are unconvinced that it's there.
Freedom came out of bankruptcy with reduced debt, but debt nonetheless. It's unclear whether the sale of the T.V. stations was used to pay it off, prior to selling the newspapers. So 2100 Trust's deal could involve acquiring that debt.
If you apply a boilerplate leverage buy-out ratio of 30 percent equity to 70 percent debt, and we go with the $156 million number, 2100 Trust is bringing about $47 million to the deal in equity and financing the rest, about $109 million. Not an outrageous amount, when you consider that the private-equity purchase of the Star Trib involved more than $500 million in borrowing.
The bottom line is that 2100 Trust looks to be buying future rather than present profit. It may be able to get that, even as a value of newspapers continues to fall. Circulation for the OCR Sunday's edition has increased recently, a hopeful sign. But I'll look at how Kushner might make money in a separate post. There's no shortage of risk in this deal, particularly when you consider the track record of the investment team.
To get some comment on my numbers, I called Manchester's representative at the U-T, as well as Dirks, Van Essen & Murray, the law firm that advised on the Freedom/2100 Trust deal. No word so far. I'll update when I hear something.
*These numbers aren't necessarily the most recent, not are they necessarily the most accurate. OCR daily circulation for just the straight-up paper is under 200,000. It rises when you roll in the website, Kindle editions, and "branded product," notably a Spanish-language paper.