i Newspapers' suitor has real estate-based price
Morning Sentinel
Newspapers' suitor has real estate-based price
BY TUX TURKEL Kennebec Journal & Morning Sentinel 03/20/2009

BY TUX TURKEL

AND MATT WICKENHEISER

Portland Press Herald

The investment group seeking to buy MaineToday Media, Inc. has negotiated a "bargain basement price" based heavily on the value of real estate, according to documents prepared for an investment presentation made last week.

Investors would have the potential to pay off debt within three years through the sale of real estate and through cash flow generated by the newspapers. It's possible they could make a profit estimated to be five times net earnings should the business be sold in the future, the documents suggest.

Investors would be putting their money into a newspaper company that could increase net earnings through cost savings, innovative marketing and labor concessions, the documents suggest.

These and other projections are contained in a presentation prepared for the Maine Public Employees Retirement System board of trustees. The pitch to the board was put together by Richard Connor, publisher of the Wilkes-Barre Publishing Co., and Peter Brodsky, a partner at the HM Capital Partners private equity firm in Dallas.

The retirement system manages an investment fund valued at $7.6 billion, supporting retirement plans for roughly 75,000 current and past state employees and teachers. In February, the trustees agreed to use 5 percent of the fund for private equity investments. The businessmen seeking to buy the paper met with the board last week, hoping to get trustees to consider putting some of that 5 percent toward the purchase of the newspapers, including the Portland Press Herald/Maine Sunday Telegram, the Kennebec Journal in Augusta and the Morning Sentinel in Waterville.

It has been a year since MaineToday Media, Inc. was put up for sale. The Seattle Times Co., parent company of Blethen Maine, announced on March 17, 2008, that it intended to sell its properties. Contacted for a comment on the "bargain basement" characterization, Jill Mackie, vice president of public affairs for the Seattle Times, referred questions Robert Bickler, president and chief executive officer for MaineToday Media, Inc.. Bickler declined to comment Thursday. Neither the seller nor potential buyer have specified the purchase price.

On Tuesday, Peter Leslie, the chairman of the retirement system board of trustees, said investment advisers and an ad hoc committee recommended against investing in the deal. Leslie said that if any board member wants to discuss the proposal further, it can be brought up at the April board meeting. He cited several factors for the recommendation, including a lack of hard data from the businessmen. Leslie also noted that the proposal didn't match the sort of investment the board wanted to make.

Leslie provided the 14-page presentation to the Portland Press Herald/Maine Sunday Telegram. Copies were distributed to the board members at the meeting, according to State Treasurer David Lemoine, who is a trustee. But the document wasn't actually used in the pitch, said Lemoine, or even referred to by Connor and Brodsky when they spoke to the board.

Reached Thursday, Connor said too much was being made of the document. The presentation contained projections meant to be starting points for discussion, he said, and reflect figures that can and do change.

"People not familiar with merger and acquisitions should remember that deals are not static, they are dynamic," he said.

Connor said he makes similar presentations almost daily and, despite what the presentation might imply, he expects to close the deal within 30 days.

He and his partners have been working since last July to buy Blethen Maine's assets, and have made similar time projections in the past.

Until now, all Connor's pitches to investors have taken place in private. So the information in these public documents "however fluid" offer a glimpse at one point in time into how entrepreneurs might restructure Maine's largest media group to thrive in the future, during a period when the overall newspaper industry is struggling.

One newspaper broker who examined some of the key elements of the documents said they seem aimed at assuring investors that their risk is offset by the value of real estate, regardless of how the newspapers perform.

"This is a classic private equity deal," said Robert Broadwater, managing director of Broadwater & Associates in New York.

The goal in such a deal, Broadwater said, is to buy at a low price in a bad economic environment and grow profitability.

The documents say the newspapers are a "great deal" because of the economy, a price that reflects a seller fighting to protect other assets and the presumption that "newspaper has become a four-letter word." But despite a total projected revenue decline this year of 19 percent at the Blethen papers, the documents say, the deal is still attractive.

Another plus: Between two-thirds and 100 percent of the purchase price reflects the value of real estate.

According to city tax assessments, Blethen properties in Portland and South Portland are valued at roughly $26 million. Property in Augusta is valued at $2.5 million; the real estate in Waterville is valued at $1.25 million.

The documents also suggest the owners could sell $10 million worth of real estate and lease it back for $7 million, at a 10 percent interest rate.

Connor said these projections are preliminary. No one can say what the largely vacant former press building and parking lot at 385 Congress St. is worth until it's sold, he said. His group has only done a formal appraisal of the current Press Herald printing plant in South Portland, he said. Also, tax valuations can vary widely from actual market values.

In any business deal, he said, a new owner would look at real estate that's not essential to operations and try to sell it. The projection that surplus property could be sold in three years to pay off debt is a hope, he said, not a promise.

Commercial brokers in the Portland market offered mixed views on how difficult it would be to sell properties, without knowing how they might be priced.

"The timing is just not good right now to sell those buildings in this economy," said Charlie Craig, with NAI The Dunham Group. "The buildings have value, and maybe they discounted the value of the buildings. There's already a fair number of vacancies in downtown Portland, in superior buildings." He added, "We"ve already seen several office projects and hotel projects fail because of the economy that we"re in. In the short run, it's going to be difficult, depending on what kind of values they place on them. In three years is it possible? Maybe, if the economy turns around." Joe Malone, president of Malone Commercial Brokers, said he was sure "almost all could be sold." "The downtown stuff is great real estate. There are buyers for that either with or without the Press Herald in it," said Malone. "There are buyers for them today " I have a buyer who would like to own them now." The documents lay out other factors that will cut costs, raise revenues and make the newspapers a good investment. Among them: Union concessions that will lead to cost savings. Plans to consolidate production facilities and reduce "top heavy" senior management. Cross selling of ads across all the newspapers. Attractive bank financing secured through the Portland office of a major bank.

As part of the deal, the Portland Newspaper Guild is working on an agreement to take 15 percent ownership in the company under an employee stock ownership plan. And the union's negotiating committee has reached a "tentative agreement" with Connor on changes to the labor contract, Guild President Tom Bell has said. The guild membership may vote on the changes near the end of the month.

Asked about the documents prepared for the presentation, Bell said there "no surprises in this" for union leadership.

"His business plan makes sense to us," Bell said. "We need a fresh start with new leadership, and Connor brings that." In terms of financing, the document says HM Capital is seeking $10 million in third-party equity and will invest at least $1.1 million. Connor will invest $250,000, it says.

But in an interview, Connor said the equity equation could take many forms to raise $10 million, including a fuller investment by HM Capital.

The document projects that the low purchase price allows for a high upside for investors, when the paper is sold. No timetable is given, and Connor said there is no projection now for when the paper could be resold. But the document says investors can assume to make five times net earnings, compared to a historical average of more than 10 times.

A projection of five times earnings is very conservative, according to Gary Greene, a managing director at Cribb-Greene & Associates, a newspaper broker and appraiser. It indicates to investors that even if the business sells some day for half historic values, it's still a good deal.

"In the current economic and business environment, this is not an uncommon deal structure," Greene said.

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