Another Case Study in Media Acquisition Engineering
March 24, 2006
The McClatchy purchase of Knight-Ridders newspapers bears great similarity to what has been happening in broadcasting and other traditional media. Strategic buyers are capable of justifying higher prices than private equity firms while still accomplishing their financial and strategic objectives.
With revenues and EBITDA relatively flat, Knight-Ridder sold for between 9 and 10 times trailing, EBITDA. McClatchy is a company with an enterprise value of less than 8 times EBITDA, but had a plan for justifying the deal. Soon after the announced purchase of Knight-Ridder, McClatchy announced that they were going to sell 12 of the 32 papers acquired. These spin-off papers are in slower growth markets and are expected to generate prices in the 7 to 9 times EBITDA range. With the sales of these 12 papers, the result for McClatchy is the purchase of 20 strategically located papers in above-average growth markets, plus interest in some attractive Internet assets, for a price between 9 and 11 times EBITDA.
After spinning off these non-strategic papers, the next step will be assimilation and cost-cutting. McClatchy management anticipates that the elimination of redundancies in corporate and Internet operations, alone, will reduce first year expenses by $60 million. This brings down the proforma EBITDA multiple for the 20 paper group to between 7.5 and 9.0 times EBITDA. Thereafter, there will be the differences in management philosophy and performance. McClatchys group operated at a 23% operating profit margin in 2005, compared to 16% at Knight-Ridder.
If McClatchy can improve the margin at these 20 papers by 5% to 7%, the annual savings could be an additional $75 million-plus. Although this transformation would not happen right away, it would transform the proforma EBITDA into the 6 to 7 times range. The result is an accretive purchase that dramatically transforms the acquiring company.
While the multiple ranges are lower than what we have seen in some comparable broadcasting transactions, the logic is similar. Two recent examples of such strategic acquisitions would be the purchase of the Emmis TV stations by LIN, as well as the purchase of the Susquehanna radio stations by Cumulus. LIN was able to take advantage of having stations in the same areas to make sense of the Emmis station acquisitions. Cummulus' acquisition enabled them to strategically enter large markets with established properties.
These are all examples of how strategic buyers can utilize existing assets and management, as well as systems and procedures, to recast the performance of acquired assets into a deal in which the winning price can still be accretive and meet corporate goals.
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