News Corp.'s $5 billion bid for Dow Jones & Co. Inc. may have fueled a modest rally among newspaper stocks but it's unlikely to spark similar deals or push publishing sector takeover values higher, analysts say.
The $60-a-share bid by Rupert Murdoch's media conglomerate in May was a hefty 65 percent premium to Dow Jones' closing price the day before the offer -- way above the 19.4 percent premium that research firm Dealogic calculates is the 2007 average so far for U.S. takeovers. It is also a high multiple compared with how other newspaper stocks are valued.
But the move doesn't signal the start of a run of high premium bids for newspaper assets, say analysts.
The Wall St Journal is one of those international papers of record that really is so significant a property ... that it is unique and defies description in terms of how it gets priced, said Murray Schwartz, a mergers and acquisitions lawyer with Katten Muchin Rosenman LLP. It's like buying a Picasso, said Schwartz. I don't think it will have any bearing on any other newspaper deal in the world.
Benchmark Co. publishing industry analyst Ed Atorino voiced a similar view. The News Corp. move to take over Dow Jones has nothing to do with the newspaper publishing business whatsoever -- it has to do with the brand name and the financial position of the Wall Street Journal, Atorino said.
The asset also attracted interest from other parties. General Electric Co. and Financial Times-owner Pearson Plc looked at a deal but said on Thursday they had decided against pursuing it.
Since News Corp.'s offer for Dow Jones was made public at the beginning of May, publishing stocks have risen modestly, with the Dow Jones publishing index up 2.4 percent.
Goldman Sachs analysts wrote in a recent research note that newspaper stocks had staged a modest rally recently, fueled in part by the News Corp. bid and speculation that Dallas Morning News publisher Belo Corp. may spin off its broadcast division. But they point out very weak current revenue trends for publishing.
There's no question that newspaper companies know that they're fighting on multiple fronts, said Jeffrey Dearth, partner at media investment banking firm DeSilva and Phillips. Circulation is down or at least plateauing in most markets. More and more people are getting their news online. The big elephant in the room is classifieds, which is where they made their money for years.
A number of newspaper companies are trading around historic lows in terms of their enterprise value to cash flow, says Michael Kupinski, director of research at Noble Financial Group. He tracks the average trading range for newspaper companies over the last 20 years being in the range of 8-12 times enterprise value to cash flow, but says a large group of companies are trading in the 8-9 times range.
News Corp.'s bid values Dow Jones at around 16-17 times 2007 earnings, according to a research note published by Citigroup.
Kupinski thinks newspaper valuations could trend higher over time, although he says that is dependent on the economy.
Inflation and high energy prices are really taking a dent out of the consumer, Kupinski said. There's a very high correlation to newspaper advertising and personal income.
NO DEAL RUSH
While there have been a number of recent deals, such as the $8.2 billion buyout of Tribune proposed by real estate magnate Sam Zell and the 2006 takeover of Knight-Ridder by U.S. newspaper publisher McClatchy Co., analysts don't see a flurry of deals ahead, with the sector battling declining revenues as advertisers and readers flee print for the Internet.
I think the focus is on fixing businesses instead of leveraging up to buy somebody else's business that's struggling, said Atorino. I don't see any deals -- maybe some asset sales here and there but I don't think there will be a rush to merge.
Sometimes it has proven a lengthy process to seal a deal. The Tribune sale took months after an initial round of bidding drew scant interest.
Kupinski cautions that private equity buyers would be concerned about the outlook for advertising, but didn't rule out buyout firms taking a look at companies in small-to-medium sized markets that don't have a lot of competition.