By Lou Phelps, Managing Partner, PC&A August 5, 2013 – As is to be expected, there’s a significant news swirl taking place this week around the sale of The Boston Globe to John W. Henry, principal owner of the Boston Red Sox. To be more accurate, the New York Times Company sold Henry its entire New England Media Group division which also includes The Worcester Telegram & Gazette, Boston.com and a number of other assets, for only $70 million. The price seems low to PC&A, particularly when one looks at the value of the real estate alone. Boston and Worcester buildings and land assets are on the tax rolls for over $60 million. And, in fact, a number of unsuccessful bidders are now telling The Boston Herald and other interested news organizations that bids for significantly higher amounts were offered, but all rejected. One bidder says he offered $80 million, and another – U-T San Diego CEO John Lynch – said his company bid “significantly higher than Henry and was willing to shell out even more, but Times execs locked them out of negotiations late in the process,” according to a Boston Herald story this past weekend. Prices as high as $120 million were tossed around publicly during the Spring. The news on the sale of the Washington Post’s newspaper publishing division today for $250 million to the CEO of Amazon adds additional fuel to the fire, in our opinion. The Post’s newspaper publishing division revenue totaled $138.4 million in the 2nd Qtr. ended June 30, and is running at approximately $550 million annually. At a price of $250 million, the Washington Post newspaper division sold for approximately 45% of annual gross revenues. The Post’s newspaper division also had an operating loss of $14.8 million in the 2nd Qtr., yet was worth $250 million to buyer Jeff Bezos. This is a dramatic sales price ratio difference from the Globe transaction price and ratios. Certainly, there is deep financial ‘history’ between the NYT board and Henry which may have contributed to their choosing him as the buyer. The Times reaped a healthy return on its $75 million investment in Henry’s Fenway Sports Group in 2002, which included the Red Sox and the New England Sports Network. The NYT company sold half of its 700 shares in July 2011 for $117 million cash, and the remainder for $63 million in May 2012, for a healthy total profit. If the New York Times Company was privately held, they would have the right as a seller to do as they please. But they are publicly traded, with stockholders outside ‘the family’ and board. What’s to gain by not taking the highest bidder? But getting back to the price paid and the actual ratio’s for the NYT’s New England Media Group: for M&A consultants and advisory companies, such as Phelps, Cutler & Associates, we’re interested primarily in the math. We want to find out about the multiples that the successful buyer actually paid, and the terms. And, were there mitigating factors, not disclosed? The actual EBITDA – cash flow – of the New England Media Group has not been released. But, the price seems low to us at PC&A based on information that is available in the public domain. Here’s what we know for sure: 1.) TOTAL revenue for the New England Media Group was $380.4 million for the last 12 trailing months, according to the company’s 8K filings with the SEC. The $70 million that John Henry paid is only 18.4% of gross revenue, a low ratio when there are many deals closing at 30% to 50% of gross, routinely. And, as outlined above, the Washington Post deal appears to be at approximately 45% of gross revenues. 2.) The total NYT Co. had an EBITDA – operating cash profit – of $53.4 million in the second Qtr. ended June 30, 2013, and was operating at a 21.2% cash flow margin on operations. This was up from $44.1 million in same Qtr. last year… a strong profit improvement picture… and consistent with how many newspaper companies are currently trending. While the profit of just the New England Media Group has not been released, the company has acknowledged that ‘The Boston Globe is doing better.’ The Boston Globe’s challenges are no greater than those of the New York Times in the brutally competitive NYC metro area. 3.) The New York Times reported that The Boston Globe, alone, now has 39,000 digital subscribers as of June 30. 2013, up 70 percent over the 2nd Qtr. last year. They have sold both www.Boston.com and www.BostonGlobe.com to Henry. Digital subscriptions are high-margin revenue. 4.) The Boston Globe’s most recent ABC Publishers Statement of paid circulation states that the company is selling an average of 382,452 newspapers on a Sunday, and an average of 245,572 papers Monday – Friday. 5.) As newspaper industry leaders know, as each month goes by, more and more newspaper companies are successfully selling an online-only subscription for the same rate as a print subscription – or dramatically increasing digital-only subscriptions. The Globe, however, still has a significant variance between a print and a digital-only subscription. This means there is a BIG upside to future circulation revenues. 6.) The Globe’s current home delivery 7-day subscription price is $8.05 a week – $418.60 annually. Digital-only rate is $3.99 a week – $ 208.48 annually. Do the math on the subscription rates, and current paid subscribers. In total, the New England Media Group had approximately $146 million in circulation revenue over the last 12 trailing months (SEC filing), yet the total group is only worth $70 million? 7.) The circulation revenue for the New York Times alone was up 7.4% in the first six months of this year versus last, yet the New England Media Group’s circulation was down -2.1%? Why such a difference? The New York Times is charging $12.70 a week for full 7-day home delivery/digital package vs. Boston Globe’s $8.05/wk. 8.) And, what’s going on in Worcester, also part of the New England Media Group? Is there more revenue opportunity in that market where the newspaper and its website dominate? The Worcester Telegram & Gazette is selling 78,400 newspapers on an average Sunday, and more than 75,000 daily, Mon – Friday, according to their most recent ABC report. Annually, the T&G’s 7-day home delivery price is $386.00, though they have a 50% off sale going on currently online for new subscribers. Even if every 7-day subscriber was paying only 50% of rate, that’s $15 million out of Worcester, alone. And, you can be sure that current subscribers are NOT getting that offer in their mailbox. They also own the dominating web URL of www.Telegram.com, a valuable asset. So… from all this….what can we surmise about the EBITDA multiple? The New York Times company is running at a 21.2% cash flow. If the New England Media Group is consistent with the company average, and on Gross Revenues of $380.4 million, a 21.2% cash flow means the New England assets are throwing off $80 million a year in cash. Worse case scenario, based on known circulation revenue and industry trends, even if The Globe, et al, is only operating at a 10% EBITDA… that’s still $38 million a year in cash flow. Borrowing costs on $70 million? Worst case scenario: maybe $7 million a year? Looks like a pretty good acquisition doesn’t it, particularly when the NYT Company kept the dreaded pension liability of the entire group. There is also unpleasant blogging going on about John Henry’s motivation and eventual strategy. Surely, we all believe that it’s about more than protecting the history of The Boston Globe, or the power of controlling the paper’s sports coverage of the Boston Red Sox. There was also an inclusion in Henry’s statement that caught our attention at PC&A; it alluded to future announcements about “partners in the deal.” Is Henry actually the front for a group of other investors to be named later, perhaps those with interests in development projects such as casinos in Massachusetts? Or, is this a flip – was he just a straw – and will we see a new owner, shortly? It has been reported that he was “late to the game” in bidding on the company. Was he an invited guest? There was no question that the sale of this historic newspaper company – including one with a web strategy that also dominates a major U.S. market – would be surrounded by a bit of controversy. PC&A was a consultant for the Globe’s long-time owners, the Taylors, in 1993 when they sold The Globe to the New York Times. I was actually in the Globe headquarters on Morrissey Blvd. that day, and I seem to remember that there was a little controversy then, as well! If memory serves, the NYT ran a story that they had “acquired” The Boston Globe, while the Globe ran a story informing readers that they had “merged” with the NYT. Only a one-word difference perhaps, but a world of difference as many in leadership there soon learned. Lastly, PC&A would refer the reader to a chart developed and posted by Aswath Damodaran at the Stern School of Business at NYU, entitled “Revenue Multiples by Sector” updated January 2013. It shows that on average, newspapers are generally valued at 1.2x gross revenues, and are running at an After-Tax margin of 8.98%. EBITDA would be significantly higher, therefore, as currently being achieved by public companies such as Gannett, Lee Enterprises and The New York Times Company – all running at close to 20% EBITDA’s. His work can be found at http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/psdata.html. – 30 – Ms. Phelps is Managing Partner of Phelps, Cutler & Associates, Consultants to Media, Savannah, GA. www.PhelpsCutler.com. © All rights reserved 2013. She can be reached for comment at firstname.lastname@example.org.