David Copley's Wallet Losing Heft

— Wall Street seems to be saying "Lights out!" to daily newspaper chains, but David Copley -- although almost certainly not the billionaire he is touted to be -- can still pay his utility bill.

Stocks of newspaper groups have sagged since 2004, and the selling intensified this month because of negative reaction to the proposed purchase of Knight-Ridder at a lowball price. Values of daily newspaper assets are being marked down, and that means the valuation of the privately held Copley Press is falling.

Late last year, Forbes magazine in its list of the 400 richest Americans placed David Copley, owner of La Jolla- based Copley Press, 283rd at $1.2 billion. Although David has stock market, venture capital, and real estate investments outside the company, Forbes based the estimate overwhelmingly on his ownership of Copley Press, says Matthew Miller, staff writer for the magazine and one of two persons responsible for the Forbes 400 each year.

This means that last year, Forbes was saying the Copley Press is worth over a billion dollars. If the newspaper industry continues "on its downward turn, the valuation [on David's wealth] will change next year," says Miller. "We trim these things." Because statistically Copley Press does not appear to measure up impressively with Knight-Ridder and other chains, my guess is that the "trim" will be more like a slash.

A billion-dollar valuation of Copley Press "is within the realm of reasonableness," says John Morton of Maryland-based Morton Research Co. At least three newspapers Copley owns, including the Union-Tribune, are quite profitable, says Morton.

Larry Grimes, president of W.B. Grimes, a Maryland investment firm specializing in media, thinks newspaper valuations will turn back up, and he also believes Copley Press assets "could bring a pretty penny." However, he says of the Forbes 2005 estimate of David's wealth, "That valuation was pre-Knight-Ridder; maybe Forbes would like to do another valuation."

Is Copley Press, the 19th-largest newspaper chain, worth more than a billion dollars when the stock market a week ago put a valuation of only $4.2 billion on the 2nd largest, Knight-Ridder? In the middle of this month, Knight-Ridder agreed to sell itself to Sacramento's McClatchy Company for $4.5 billion plus assumption of $2 billion in debt. McClatchy, publisher of the Sacramento Bee, Fresno Bee, and Minneapolis Star Tribune, among 26 other papers, intends to dump 12 of the papers it will acquire from Knight-Ridder.

That's assuming the deal goes through as planned. After the announcement, the market whacked stocks of Knight-Ridder and McClatchy as well as other newspaper chains. For one thing, the sale of Knight-Ridder, forced by an investor owning 18.5 percent of the stock, did not attract a slug of bidders. In the end, only McClatchy made an offer. As Morton points out, McClatchy proposes to pay only 9.5 times cash flow (cash receipts less cash payments) for Knight-Ridder. Last year, Iowa-based Lee Enterprises paid 13.5 times cash flow for the Pulitzer papers, including the St. Louis Post-Dispatch.

Last October, Forbes valued Copley Press at 10 or 11 times cash flow, says Miller.

Wall Street has soured on daily newspapers. Last year, industry circulation was down 2.6 percent daily and 3.1 percent Sunday. Advertising was up a mere 1 to 2 percent. Newspaper stocks fell an average 20 percent, and stock of the New York Times Company plummeted 35 percent. This year, newspapers are still out of favor. In particular, demographics hurt: the only people who aren't cutting back on newspaper reading are those over 65, so the market is dying off. More and more get what news they want (depressingly little) over the Internet or from TV. Classified advertising is cratering. The negativism on newspapers persists even though the industry is much more profitable than most other industries.

The Union-Tribune is also in a tailspin. The daily paper reaches slightly more than 30 percent of county households, down from 46 percent in the early 1980s. Advertising, particularly classified, is under pressure.

So how does Copley stack up against Knight-Ridder? According to Forbes, Copley wrings 20 cents of earnings power out of every dollar of revenue, the average for large chains, compared with Knight-Ridder's 17 cents.

Other comparisons suggest Copley is hardly worth one-fourth of Knight-Ridder. Copley publishes 9 paid-circulation daily newspapers and 11 non-dailies. Knight-Ridder publishes 32 dailies and 65 non-dailies. Copley's total daily circulation is 700,000. Knight-Ridder's is 8.1 million. Copley has 5 dailies in the top 200 newspapers ranked by circulation. Knight-Ridder has 21. Copley's annual sales are $550 million. Knight-Ridder's are $3 billion. Knight-Ridder's profits are almost as high as Copley's sales.

Copley's papers are in slow-growing markets in Illinois, Ohio, and California. For example, Copley owns the Peoria Journal Star. Population in that Illinois metro area declined from 366,000 to 347,000 between 1980 and 2000. Copley owns the Repository in Canton, Ohio. Population there is barely crawling upward -- common for the industrial heartland.

And San Diego? It has always been considered a Sun Belt growth market. But San Diego County population slipped last year for the first time in three decades, a victim of high housing prices. The previous year, growth was just 1 percent. San Diego businesses have to get used to operating in a slow-growth market. One of the slow-growth Knight-Ridder papers that McClatchy plans to dump is the San Jose Mercury News, of Silicon Valley, a former sizzling-growth area belted by the tech wreck and peopled by techies who consider ink and paper out of date.

Morton, who was a consultant in Copley's purchase of the Peoria paper, says it, the Galesburg Register-Mail in Illinois, and the Union-Tribune are very profitable. If some of the others sport high returns, then the Copley chain's cash flow -- the most important value determinant -- could be strong.

Harold W. Fuson Jr., vice president and general counsel of Copley Press, agrees that "it's all about cash flow" but won't reveal his company's.

It's possible the chain could be worth $1.1 billion if it were valued at two times sales. Forbes says it's worth slightly more than double revenue. But only one major newspaper chain is capitalized at two times sales: the highly diversified Washington Post Company is valued at 2.01 times sales, and McClatchy, Gannett, and Dow Jones are valued at around 1.9 times sales.

But these chains are capitalized at significantly lower multiples of sales: New York Times Company 1.11, Tribune Company (including the Chicago Tribune and Los Angeles Times) 1.54, Knight-Ridder 1.40, Belo 1.39, Lee Enterprises 1.52, Media General 1.22, Journal Communications (including the Milwaukee Journal Sentinel) 1.14, and Journal Register Co. 0.85.

Of those, Lee Enterprises, which among other things owns the North County Times, most resembles Copley Press. Both companies are strictly in newspapers. Lee is larger than Copley (58 dailies, 30 weeklies, daily circulation of 1.7 million) and has papers in slow-growing, midsize markets in states such as Wisconsin, Nebraska, Indiana, Missouri, and Illinois, plus some in California and Arizona. Lee rakes in about the same percentage of earnings power from sales as Copley does.

If Copley should be capitalized at Lee's 1.52 times sales, then David Copley is far from a billionaire on paper, although he should have no problem paying for incidentals such as the individually tailored yacht he is having built up in Washington.

David has had a heart implant, and insiders engage in guessing games whether the company plans to sell itself eventually or be run by a nonprofit foundation. Fuson won't address such issues, but he emphasizes that Copley Press is not for sale. He won't say whether the company may buy some of the papers McClatchy will sell if the proposed purchase of Knight-Ridder goes through as currently anticipated.

"We feel the newspaper business is a sound business," says Fuson. Tell it to Wall Street.

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