Platinum Equity LLC likes to buy companies in troubled industries, so its purchase of the San Diego Union-Tribune newspaper should make perfect sense. But the question is whether one private equity firm can change the failing business model of daily papers.
Announcement of the Union-Tribune acquisition came within weeks of disclosures that Tribune Co., owner of the Los Angeles Times, had entered bankruptcy; Denver's Rocky Mountain News would cease publication after 149 years; Hearst Corp. was contemplating closure of the San Francisco Chronicle; and the Seattle Post-Intelligencer would end its 146-year run in print. Leveraged buyouts of the Minneapolis Star Tribune and the Philadelphia Inquirer both ended in bankruptcy filings.
Against that background, Beverly Hills-based Platinum Equity agreed March 18 to buy the Union-Tribune for an undisclosed sum. It expects to complete the transaction in the second quarter.
"We wouldn't make the investment if we didn't think we could help this newspaper not only survive but thrive through this recession and beyond," said Mark Barnhill, a principal at the Beverly Hills investment firm and a former editor at the Los Angeles Daily News.
The deal happened after Platinum decided the newspaper sector fit its investment profile of a distressed industry. Principal Louis Samson found the deal and negotiated the sale with the Copley family, which has owned the paper since 1928.
Platinum is led by Los Angeles billionaire Tom Gores and specializes in streamlining operations at acquired companies and that's the plan for the Union-Tribune. Gores ranked 25th last year on the Business Journal's list of Wealthiest Angelenos with an estimated net worth of $2.5 billion.
Brette Simon, an attorney at Jones Day in Los Angeles who has worked on several Copley deals, said the Union-Tribune is uniquely ready for an efficiency upgrade.
"As a family-run business, they weren't under the same pressures and they aren't run as leanly as other newspapers. I have no doubt that a lot of fat can be cut from the Union-Tribune," Simon said.
David Lipsey, managing director of media and entertainment in the L.A. office of FTI Consulting, said Platinum could pursue a number of strategies to increase revenues at the paper, including aggressive sales of Internet advertising, negotiating content exchanges with Web portals, cutting money-losing subscribers, renegotiating labor contracts, and streamlining the print and digital ad sales teams.
Despite all the bad news about daily papers, Lipsey said the well-run ones are still very profitable. He believes the downward spiral of publishing has reached a nadir and publishers will soon start to reassert the value of their publications for readers and advertisers.
"There are still no substitutes for advertising inserts in the Sunday newspaper and that will maintain for a reasonable time into the future," Lipsey said.
Simon called San Diego a landlocked market with Mexico, mountains and ocean making it impossible for papers in neighboring markets to steal ad dollars from the Union-Tribune. She also believes part of the attraction for Platinum involved noncore assets, such as the Union-Tribune building.
Lipsey added that if the Union-Tribune experiment proves successful, Platinum could duplicate it elsewhere.
Indeed, Platinum's Barnhill said the Union-Tribune was the firm's first newspaper play, but not necessarily its last.
"Our approach is to determine an industry in distress and once we acquire a company, use it as a platform for entry into the sector," he explained. "I would expect us to view this industry the same way."
Unlike other private equity firms, Platinum buys companies but rarely sells them. Barnhill confirmed that for the Union-Tribune, the firm had no exit strategy or timeline. The plan is to hold the newspaper as a stand-alone company.
Barnhill declined to speculate on who would head the operation.
Although two private equity media acquisitions involving Los Angeles have gone sour recently, experts agree that Platinum has a better chance to make this one work.
Lipsey called the Union-Tribune a good investment with different parameters than either Sam Zell's acquisition of Tribune Co. or Haim Saban's purchase of L.A.-based Univision Communications Inc., privatizations that foundered due to excessive debt to pay for the acquisition.
"Platinum is a very savvy investor group; I'm sure they've watched their brethren in the media crash and burn, and learned the appropriate lessons," Simon said.
Barnhill declined to discuss numbers, but said Platinum conducted extensive due diligence.
"We don't discuss capital structure of transactions," he said. "However, in the context of this investment, let me say the business will not be overburdened with debt. It will have a conservative leverage ratio and will be able to function with a focus on the business, not on servicing its debt."
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