For newspapers, the easy deals might not be the smart deals

Though a few operate of them at favorable margins, most are struggling to overcome the declining print revenues, insufficient digital growth and consumer revenue challenges that have defined the newspaper business recently, and analysts expect a wave of consolidation to roll through the industry as they search for bigger scale and cost savings.

But the short-term logic of those purchases may make it harder for the acquiring businesses to achieve their long-term goals. Local newspapers need to diversify away from advertising, not commit further to it, and the debt that comes with buying competitors limits investments in new revenue streams that might keep local publishers going.

The longer that dynamic remains, the more uncertainty will hang over local news. “There’s some value in local newspapers,” said David Lieberman, an associate professor at the New School’s graduate media management program. “We just don’t know how much.”

While deals involving nationally recognized titles are few and far between, consolidation in local news has been picking up over the past few years. Forty-five daily newspapers changed hands in 2018, in deals worth more than $857 million, the highest totals by transaction volume recorded since 2000, according to data compiled by Dirks, Van Essen, Murray & April, an advisory focused on newspaper mergers and acquisitions.

Those totals represented the fourth consecutive year of growth in newspaper M&A activity, the firm said, and the market is on pace to surpass last year’s totals: Through the first half of 2019, DVM&A recorded the sale of 32 daily newspapers.

The acquirers are looking to bolster positions to grab up as many ad dollars as they can. Though the Gatehouse-Gannett deal could face some measure of regulatory scrutiny – the combined companies would operate 263 daily media properties, and would have a dominant market position in states including Florida and Ohio, for example – observers believe that antitrust concerns will not prove an obstacle for most future deals.

“I think that’s a bit of an antiquated concept because of how fragmented media has become,” said Sara April, a partner at DVM&A said of antitrust concerns. “Even if you control a large number of newspapers, there’s still so many other avenues where news can be conveyed.”

But the acquisitions take resources away from investments they might make in newer businesses, which most newspaper publishers need to develop themselves. Because they are more mature and face declining revenues, most newspaper publishers do not have the luxury of deciding whether to build or buy things that might diversify their revenues.

“One of the issues with both newspapers and magazines is their own valuations are relatively low on an EBITDA [earnings before interest, taxes, debt and amortization] basis,” said Reed Phillips, managing partner at investment bank Oaklins DeSilva + Phillips. “If the value of your own business is only six or seven times EBITDA, it’s hard to buy something that’s [valued at] 12 times EBITDA, like an events business.”

There are plenty of examples of news publishers moving into new revenue streams that support and serve the communities they reach with news. For example, The Pilot, a community newspaper in Southern Pines, N.C., gets just 25% of its revenue from print advertising today, thanks to investments made in businesses ranging from podcasts to a community bookstore, said Penny Muse Abernathy, the Knight Chair of Journalism and Digital Media Economics at the University of North Carolina.

“If you’re in a market that is relatively affluent or it has economic variables that are in line with the U.S. average, and you have a publisher that is very strategic, disciplined, and creative, you have a better than average chance of surviving,” Abernathy said. “But it’s not about diversifying from print to digital. It’s diversifying your income.”