Bids for newspapers have never been solely about financials. More than most businesses, media properties, especially newspapers, tend to fetch outsized bids.
For Tronc Inc. (TRNC) , owner of the Chicago Tribune and Los Angeles Times, that could mean having to overpay if it wants to acquire its longtime crosstown rival, the Chicago Sun-Times.
Tronc's chairman, the unpredictable Michael Ferro, is intent on buying the Sun-Times to share costs with his own Tribune. Before becoming Tronc's largest shareholder and changing its name from the venerable Tribune Publishing Co., Ferro owned the Sun-Times through his former media company, Wrapports LLC.
To acquire the Sun-Times, Ferro will have to outbid a group headed by Edwin Eisendrath, a former city councilman and managing partner in a Chicago group that develops international education programs. Eisendrath's investor group, which includes the Chicago Federation of Labor, is prepared to bid $15 million for a controlling stake in the Sun-Times, Chicago media writer Robert Feder reported Monday, June 19.
Eisendrath later confirmed the bid in a retweet of Feder's story.
The Sun-Times on Tuesday said the broker handling the sale had received multiple bids and cited an email from publisher Jim Kirk to employees that Eisendrath's bid would be evaluated for "whether it meets the standards agreed to with the U.S. Department of Justice at the outset of this process."
A Wrapports spokeswoman wasn't immediately available for comment.
Eisendrath's bid would represent a rich valuation for a metropolitan daily newspaper in 2017, according to Owen Van Essen, a longtime newspaper broker and partner in Santa Fe, N.M., firm Dirks, Van Essen & Murray.
Wrapports purchased the Sun-Times in 2011 for $20 million to $24 million, Van Essen said, but that deal included a string of suburban newspapers known as the Pioneer Group. Rather than the Sun-Times, it was the Pioneer Group's six daily and 32 weekly suburban newspapers that accounted for most of the cash flow, he added. Tribune Publishing acquired the Pioneer Group in 2014.
"A $15 million purchase for Chicago Sun-Times right now surprises me," Van Essen said.
The reason is simple: Newspaper bids have long been based on a presumption of cash flow, and these days newspapers are selling at 3.5 to 5 times cash flow plus some expenses such as capital expenditures. With that kind of multiple, Sun-Times earnings before interest and other expenses would be $4 million to $5 million.
"And that's a lot more than I thought was there," he added.
In fact, according to my colleague Ken Doctor, Sun-Times can expect to lose almost $4 million this year and in 2018. Not surprisingly, Gannett Co. (GCI - Get Report) , Illinois- based Paddock Publishing and Shaw Publishing elected not to bid for the newspaper.
To understand how much the value of newspapers has dropped over the past 10 years, Van Essen said that before the 2008 recession, newspapers were routinely securing prices at 10 to 12 times Ebitda. Yet despite lower valuations across the boarder, Sun-Times has local cache, which is what makes newspapers unique properties.
Furthermore, Sun-Times owns no physical assets. The newspaper long since sold its building and currently rents its space. The newsroom is down to less than 70 employees from more than 400 at the turn of the century. Publishing and delivery functions are now handled in a cost-sharing agreement with Tronc, one reason Ferro would like to acquire the newspaper.
For Tronc, buying Sun-Times would bring Ferro full circle. When Ferro paid $44.4 million for a 16.6% stake in Tribune last year, he sold his position in Wrapports and gifted a 40% position in the Sun-Times to the California Community Foundation, a Los Angeles charitable trust that funds groups and projects in southern California.
Earlier this spring, Wrapports said it would sell its 60% position in Sun-Times, prompting Ferro to issue a letter of intent in May to acquire the newspaper and alternative weekly Chicago Reader. Preferring to sustain multiple news gathering outlets, the U.S. Department of Justice asked Wrapports to allow for more time to solicit rival bidders.
Yet buying Sun-Times could put more pressure on Tronc's bottom line. Net income for the first quarter fell to $953,000 from $7 million during the same period a year earlier. Sales totaled $366 million, its lowest quarterly total since Tribune Co. split its publishing assets from its television stations in 2013. The other half of the company, Tribune Media Co. (TRCO - Get Report) , is the object of a $6.6 billion bid from Sinclair Broadcast Group Inc. (SBGI - Get Report) .
At the end of the first quarter, Tronc held $160 million in cash and cash equivalents. Its share price has fallen 8.9% this year, compared with a 7.7% gain for the S&P 500 index.
Yet even as most newspapers are hard-pressed to bolster circulation and advertising revenue, Wrapports may enjoy a competitive auction for its stake in the Sun-Times, something of a rarity for metro dailies.
"All newspapers, big and small, are trading in a pretty tight multiple range," said Van Essen, who has been with the Sante Fe firm for 32 years. "There's still a market for newspapers, but there's not as many buyers as there once was, so good for Sun-Times if they can get $15 million."
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