VALCON 2010 Restructurings and the Media Sector

1

VALCON 2010Restructurings and the Media Sector

Thomas J. AllisonModeratorMesirow Financial Consulting, LLC

February 26, 2010William LiseckyOppenheimer & Co. Inc. – New York, NY

Thomas E. HillAlvarez & Marsal North America, LLC – Chicago, IL

David L. EatonKirkland & Ellis LLP – Chicago, IL

Panelists:

2

Discussion Topics

The Current State of the Print Media Industry

• Transition from Print to Digital Media

• Declining Advertising & Circulation Revenue

• Financial Instability & Bankruptcy

Evolution of Media Operating Models

• “Content Providers”

• Strategic Partnerships

• Leveraging Technology to Generate Revenue

• The Competitive Landscape for Media Companies has Broadened

Valuation trends

3

The Transition from Print to Digital Media

As many media company’s struggle to find new opportunities to offset declining advertising, circulation and other revenues, they will also need to create innovative ways to reach consumers.

The Esquire: Augmented Reality

The Sports Illustrated App for the iPad developed by Wonderfactory

4

The Transition from Print to Digital

– A recent study by the Boston Consulting Group found that 48% of regular Internet users in the United States would pay to read the news online

– Online

The WSJ has set up a “pay wall” charging consumers for access to online content

- Rupert Murdoch believes that quality content should cost money

– Mobile Phones (via dedicated “Apps” or via mobile internet browsers)

The WSJ will begin charging for mobile phone “App” access in addition to their online wsj.com site access ($1.00 per week if you are also an online subscriber or $2.00 per week if not)

– E-Reader / Internet Tablets (Kindle, Nook, Sony, pending Apple I-PAD, etc.)

- Is there room for another consumer electronic device in additional to smart phones & laptops?

- Will the next generation of these devices be a game-changer? How long will it take for this device to penetrate the market?

- Recently, five magazine publishers (News Corp., Time Warner Inc., Conde Nast Publications Inc., Hearst Corp., and Meredith Corp.) announced they are creating a digital store with common technology and advertising standards to sell their titles

– Integration of Advertising with Digital Content

How successfully publishers integrate advertising onto these platforms could determine the winners and losers

5

Traditional Media Vs. New Media

• Traditional Media Companies have been losing market capitalization to “New Media” (ie Google).

$327.1

$268.5

$127.0

$171.4

$141.0

$216.3

$96.8

$196.7

$0

$50

$100

$150

$200

$250

$300

$350

$400

1905 1905 1905 1900

($ in

Bill

ion

s)

2006 2007 2008 2009

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($

in

Bil

lio

ns

)

Large-Cap Media Public New spaper Google, Inc. Public Television Public Radio

2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in

Billi

ons)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($

in

B

illio

ns

)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in Bill

ions)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in Billions)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in Billions)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in Billions)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in Billio

ns)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in Billions)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 YTD

($ in Billions)


2006 2007 2008 YTD

$343.4

$302.8

$127.5 $122.5

$141.0

$216.3

$96.8

$121.8

$0

$50

$100

$150

$200

$250

$300

$350

$400

1905 1905 1905 2009

($ in

Bill

ion

s)

Large-Cap Media Public New spaper Google, Inc. Public Television Public Radio Total

2006 2007 2008 April 2009

Market Capitalization of Google vs. Traditional Media Companies

Source: FactSet, Year end 2006, 2007, 2008 and 2009

Note: Large-Cap Media is comprised of the following companies: NWS, CBS, VIA, DIS, TWX

Radio Index is comprised of the following companies: BBGI, CMLS, EMMS, ETM, ROIA, RGCI and SALM

Television Index is comprised of the following companies: BLC, EVC, GTN, HTV, TVL, NXST and SBGI

Newspaper Index is comprised of the following companies: AHC, GCI, GHSE, JRN, LEE, MEG, MNI, NYT, SSP and WPO

6

U.S. Advertising Expenditure vs. Nominal GDP Growth

• Changes in advertising expenditure are typically correlated to movements in nominal GDP, but changes in advertising expenditure demonstrate much greater variability than changes in nominal GDP

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%1

98

1

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

E

20

10

E

% Change in Ad Exp % Change in GDP

Source: MAGNA; Bureau of Economic Analysts; J.P. Morgan estimates.

7

Circulation- Declining Readership

• Newspaper readership has been falling for decades in the U.S. as the number of news/ information sources have proliferated.

81%

48%

30%

40%

50%

60%

70%

80%

90%19

64

1970

1973

1977

/78

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Daily Newspaper Readership % Amongst Adults

Source: Newspaper Association of America

8

Advertising Dollars Follow Consumer Media Consumption

Advertisers tend to follow their customers wherever customers are spending time

• As highlighted in the chart above, a typical person spends 1/3 rd of his/her total media time on the Internet, yet, the Internet currently attracts only 12% of total advertising budgets. This gap is expected to close over the next 18-36 months as advertisers continue to follow their customers

Source: Forrester Research.

9

Declining Advertising Expenditure

• Newspapers are experiencing a significant decline in advertising revenues (which generally comprises 70% of total revenue).

• The continued challenges in the U.S. economy has led to advertising expenditure declines across all media sectors. The substantial decline of advertising spend in the newspaper industry has been due to both cyclical factors and secular changes

Year National Retail Classified Online Total National Retail Classified Online Total2008 5,996 18,769 9,975 3,109 37,849 (14.4%) (10.7%) (29.7%) (1.8%) (16.6%) 2007 7,005 21,018 14,186 3,166 45,375 (6.7%) (5.0%) (16.5%) 18.8% (7.9%) 2006 7,505 22,121 16,986 2,664 49,276 (5.1%) (0.3%) (1.9%) 31.4% (0.3%) 2005 7,910 22,187 17,312 2,027 49,436 (2.1%) 0.8% 4.2% 31.5% 2.5% 2004 8,083 22,012 16,608 1,541 48,244 3.7% 3.1% 5.1% 26.7% 4.5% 2003 7,797 21,341 15,801 1,216 46,155 8.1% 1.7% (0.6%) - 4.7% 2002 7,210 20,994 15,898 - 44,102 2.9% 1.5% (4.4%) - (0.5%) 2001 7,004 20,679 16,622 - 44,305 (8.5%) (3.4%) (15.2%) - (9.0%) 2000 7,653 21,409 19,608 - 48,670 13.7% 2.4% 5.1% - 5.1% 1999 6,732 20,907 18,650 - 46,289 17.7% 2.8% 4.3% - 5.4% 1998 5,721 20,331 17,873 - 43,925 7.7% 5.7% 6.6% - 6.3%

Expenditures (USD mil) Year- Over -Year % Change

Source: Newspaper Association of America.

10

Newsprint Pricing Moving into 2010

• Decreasing newsprint prices have been a bright spot for publishers in 2009, helping to offset revenue losses and stabilize cash flow margins

• Major suppliers announced a series of price increases in the latter part of 2009 and it is yet to be determined if these increases can hold going into 2010. Any increase in price will have a detrimental impact on publishers cashflows.

$400

$450

$500

$550

$600

$650

$700

$750

$800

1/2/2007 7/2/2007 1/2/2008 7/2/2008 1/2/2009 7/2/2009

Standard 30lb. Newsprint Price ($/ton)

Source: Foex Pricing Index

11

Media Industry—Financial Instability Led to Several Bankruptcy Filings in 2009

12

Legacy issues: Antiquated labor structure

• Mature union relationships. The unions tend to be "old-line" organizations, such as the communications workers, graphic artists, typographers, machinists, Newspaper Guild, etc.. These unions, including some of the bargaining unit employees, likely will have been involved in significant labor disputes with the employer in the past, and won many of them.“

• Adversarial bargaining relationships. Union-management relationships tend to be adversarial, and the Unions demanding and insensitive to changed and changing economic realities confronting the industry, and often protecting union membership in bargaining units that are declining in size.

• Union Jurisdictional Disputes. Lines have blurred between the different types of bargaining units (e.g., typesetters, lithographers, machinists, operators, technicians), and newspaper unions tend to have been slower to adapt fully to the fundamental changes in the newspaper business that have led to this blurring. With restructuring, the employer often has leverage enough to complete this transformation union jurisdictional disputes (i.e., which union "owns" the work) can be anticipated, as each separate union seeks to preserve its representational status at the expense of the others.

• Onerous collective bargaining agreements. CBA's tend to be long and complex, with types of provisions that reduce operational efficiency, raise costs and impede cost-cutting efforts.

a. Ever-escalating wage rates that fail to account for business downturns

b. Strict work rules (that restrict, e.g., management's ability to schedule work, require overtime, transfer employees between jobs, maintain and repair equipment, introduce technology advancements, subcontract or relocate bargaining unit work, implement short-term furloughs/layoffs based on work loads, etc.)

c. Strict seniority rules (that tend to insulate longer-tenured employees from even-handed enforcement of disciplinary and performance standards)

d. Costly employee benefits plans (above-market vis-a-vis other industries), e.g., health insurance, disability benefits, severance pay, vacation, paid sick/personal leave, training/tuition reimbursement, etc.

13

Print Media Industry: Response to Current market

• Cost Cutting Initiatives - Aligning expenses with the new revenue realities has been the focal point of publishers for the past year

– Headcount reductions, furloughs, suspension of benefits are all tactics that have been undertaken by publishers as they seek to streamline operations and maintain positive cash flow

– Centralize certain back office and editorial operations across all publications (e.g., sales support staff and writers and editors for national news)

– Web width reductions have become common practice in the industry, as newspapers seek to shrink the size of the pages within the newspaper

– Decrease the number of pages printed as well as increase the ratio of advertising to editorial content

– Vendor concessions have also produced cost-savings for newspaper publishers

– Negotiate labor concessions with unions

– Defer capital expenditures and reduce discretionary spending

– Modify advertising pricing programs and provide discounts to incent advertisers to continue to spend

– Increase single-copy (newsstand) and home delivery price for newspaper; however, increased price leads to reduced circulation, so need to evaluate potential net impact on revenue

• Debt Restructuring - As the credit markets have thawed in the latter half of 2009 newspaper publishers have increasingly looked to restructure their debt profile, either through refinancing to push out maturities or straight buy-backs of debt at depressed prices

– Gannett completed a $500mm senior note offering in October 2009 aimed at refinancing existing debt

– In March 2009 , New York Times redeemed $250mm of notes due 2010 at a discount with proceeds from a sale/leaseback transaction

– Minneapolis Star Tribune emerged from bankruptcy in September 2009 with its main lenders becoming the new owners and its debt level reduced by 80%

– In May 2009, McClatchy announced an exchange offer for over $1bn in outstanding public notes at a significant discount

14

Evolution of Media Operating Models

Market Factors / Trends Valuation Concepts

Historical Operating Model

Print media dominated the industry;

Revenue driven by print advertising and circulation;

Online media less influential

Traditional valuation methods (discounted cash flows, comparable public companies, comparable transactions) historically utilized in this industry

Current Operating Model

Influence of print media continues to decline as online media expands;

Many newspapers/publishers forced into bankruptcy due to reduced revenue, high levels of debt, and high fixed costs;

Companies focused on decreasing leverage, improving efficiencies, implementing cost-cutting measures, and enhancing online content

Move toward strategic partnerships (e.g. Chicago Tribune’s distribution partnership with the Chicago Sun Times)

Valuation methods are currently challenging for newspapers/publishers due to negative cash flows and/or negative EBITDA, which leads to more asset based valuations (including liquidation valuations);

The Chicago Sun Times was sold in October 2009 through a §363(a) transaction for approximately $26.0 million, which was close to it’s forced liquidation value

Future Operating Model

Growth in online media expected to continue;

Customers want mobile access to content/information (i.e. iPhone, iPad, Kindle, WSJ online, etc);

Local news/content may be able to generate a premium for newspapers/publishers;

Charging for online content a relevant issue

Valuations will remain challenging as the industry evolves and the economy continues to recover;

Industry consolidation likely to continue;

Eventually industry will stabilize and traditional valuation methods will return

15

The Web and the Creation of Content Aggregators

Content Providers vs. Content Aggregators

Among the top Internet Properties, the vast majority aggregate content from outside sources and repackage it into well organized and often customizable websites

Original content providers now create material especially for the Internet or reconstitute their content for online consumption

Subscriptions on the Internet are like traditional subscription models; users pay to obtain content that they would not be able to get elsewhere

– Over the past few years, users have shown a general reluctance to pay for online content, however, a variety of entities such as ESPN, RealNetworks Inc., and the Wall Street Journal, have shown that Internet users will pay for online content if it is unique, compelling, and reasonably priced

– A la carte purchasing options, whereby users pay for a specific article or song, are growing increasingly prevalent, largely as a result of the success of Apple Inc.’s iTunes and individual applications for mobile devices

Source: comScore.

Top 25 U.S. Web Properties by Unique Visitors, January 2010 (in Thousands)

1. 174,253 6. 95,665 11. 76,065 16. 55,845 21. 46,843

2. 164,088 7. 86,605 12. 72,992 17. 51,327 22. 41,512

3. 141,052 8. 83,626 13. 68,557 18. 50,000 23. 40,997

4. 112,442 9. 82,432 14. 66,862 19. 47,641 24. 38,808

5. 110,420 10. 77,578 15. 57,661 20. 47,525 25. 37,370

16

Strategic Partnerships

• As advertising and circulation revenue continue to shift away from newspapers, publishers must shift their focus toward increasing their online presence and attracting advertisers and readers with online products; initiatives include:

– Some publishers have formed cooperatives in order to leverage buying power and create new online ventures aimed at traditional Classified arenas

Careerbuilder.com, a nationally recognized online avenue for employment postings and placements, is jointly owned by Tribune Co., Gannett and McClatchy

Classified Ventures, LLC is an operator of web portals which provide classified advertising for autos and real estate. Significant assets include Cars.com, Apartments.com and Homegain.com. Classified Ventures is jointly owned by Tribune Co., Gannett, McClatchy, The Washington Post and Belo Corp.

– These initiatives have seen some success, however publishers have not been able to come close to effectively replacing lost Classified revenues

Competition with free sites such as Craigslist has limited the monetary success of pay-sites

– Bundling pricing for advertisers to promote both newspaper and online advertising to minimize loss of newspaper advertising

– Many publishers have hired specialized sales personnel to sell online advertising

– Publishers have also partnered with internet leaders such as Google and Yahoo! in an attempt to maximize online revenue

• Valuations in the newspaper industry have been declining over the past several years with an increase seen in 2009 related to improving advertising revenue trends as well as improving cashflow margins related to cost cutting/de-leverageing initiatives.

Note: LTM = Latest Twelve Months

NM = Not Meaningful; NA = Not Available

(1) Stock price as of February 18, 2010

(2) Market Value reflects fully diluted shares (common shares outstanding, options, warrants, in-the-money convertibles)

(3) Firm Value (FV) equals Market Value plus debt less cash

Newspaper index includes GCI, LEE, MEG, MNI, NYT, SSP, and WPO

Newspaper index includes BLC, GCI, GHS, JRN, LEE, MEG, MNI, NYP, SSP, and WPO

9.9x 10.2x8.8x

6.7x7.9x

0.0x

4.0x

8.0x

12.0x

2005 2006 2007 2008 2009

Valuation Trends

17

Historical EV / LTM EBITDA

Price (1) 52 - Week Market Firm Firm Value / Revenue Firm Value / EBITDA Net Debt / EBITDACompany @2/18/10 High Low Value (2) Value (3) LTM CY 2009E CY 2010E LTM CY 2009E CY 2010E

E W Scripps Co. $6.98 $9.00 $0.67 382 384 0.5 x 0.5 x 0.5 x 10.2 x 9.3 x 6.6 x

Gannett Co. 15.27 17.33 1.85 3,607 6,759 1.2 1.2 1.3 6.4 6.6 7.1

Lee Enterprises 3.72 4.77 0.24 168 1,262 1.6 NA NA 7.3 NA NA

Media General 8.57 11.65 1.25 195 905 1.3 1.4 1.4 9.1 9.2 7.6

The McClatchy Company 5.16 6.28 0.35 442 2,170 1.4 1.5 1.7 6.8 6.6 7.7

The New York Times Company 11.13 14.87 3.44 1,609 2,368 0.9 1.0 1.0 7.7 8.1 8.3

Washington Post 416.80 495.60 300.16 3,919 3,377 0.8 NA NA 6.3 NA NA

Median $442 $2,170 1.2 x 1.2 x 1.3 x 7.3 x 8.1 x 7.6 x

Mean 1,475 2,461 1.1 1.1 1.2 7.7 8.0 7.5

Valuation Trends

18

• The following table demonstrates valuations in the newspaper industry since 2002:

Date Acquiror Name Target Name

Transaction

Value

Implied EV /

LTM EBITDA

Jan-10 Stephens Capital Partners News-Journal Corporation $20.0 NAOct-09 Carpenters' Union Pension Fund Philadelphia Newspapers 30.0 NAOct-09 Sun-Times Media Holdings Sun-Times Media Group 26.5 NAJun-09 Creditors American Community Newspapers 32.0 NAMar-09 Tennessee Valley Printing TimesDaily & TimesDaily.com (The New York Times Regional Media Group) 11.5 NAMar-09 Platinum Equity Union-Tribune Publishing Company (The Copley Press) NA NASep-08 Journal Community Publishing Group Waupaca Publishing Company 7.0 NAMay-08 Cablevision Tribune (Newsday) 650.0 8.1x Dec-07 Shaw Suburban Media Group Lee Enterprises (DeKalb Daily Chronicle) 24.0 14.0 Oct-07 GateHouse Media Morris Publishing Group (dailies and weeklies in 8 states) 115.0 8.2 Oct-07 Hearst Corp. Southern Connecticut Newspapers 62.4 NAAug-07 Arlington Capital Partners Daily Racing Form 200.0 NAJun-07 American Consolidated Media Superior Publishing (19 newspapers) & Grove Sun (4 newspapers) 65.0 10.3 May-07 News Corp. Dow Jones 5,729.2 19.7 Apr-07 GateHouse Media Gannett, 4 publications 410.0 11.6 Apr-07 Investor group led by Sam Zell Tribune Company 6,323.8 7.1 Jan-07 Courtside Acquisition Corp. American Community Newspapers 165.0 12.8 Jan-07 Macquarie Media Group American Consolidated Media 79.3 11.6 Dec-06 Avista Capital Partners Minneapolis Star Tribune (McClatchy) 530.0 6.5 Dec-06 GateHouse Media Journal Register Company, 7 publications 78.3 9.7 Oct-06 Community Newspaper Holdings Dow Jones, 6 publications 282.5 11.3 Jun-06 Wilkes-Barre Publishing Company Wilkes-Barre Times Leader (McClatchy) 65.0 8.3 Jun-06 Schurz Communications Aberdeen American News (McClatchy) 28.0 21.5 Jun-06 Sound Publishing Holdings Akron Beacon Journal (McClatchy) 190.0 9.5 Jun-06 Forum Communications McClatchy, 2 publications 139.4 10.7 Jun-06 The Nutting Company The News Sentinel (McClatchy) 92.6 11.9 May-06 Philadelphia Media Holdings McClatchy, 2 publications 562.0 10.0 Apr-06 Media News & Hearst McClatchy, 4 publications 1,000.0 11.5 Mar-06 McClatchy Knight Ridder Inc 6,042.7 9.6 Jul-05 Community Newspaper Holdings Eagle-Tribune Publishing NA NAMay-05 Fortress Investment Group Liberty Group Publishing 480.0 10.3 Jan-05 Lee Enterprises Pulitzer 1,460.0 13.5 Jul-04 Journal Register 21st Century Newspapers 415.0 11.9 Jun-04 Hollyrood Holdings Telegraph Group 1,244.7 20.3 Apr-04 Wicks and Wachovia Capital Partners Heartland Publications (Community Newspaper Holdings) 90.0 NAJan-04 McClatchy Merced Sun-Star 40.5 16.2 May-03 Dow Jones The Record of Stockton, CA 144.0 13.6 Oct-02 New York Times Washington Post - 50% share of Int'l Herald Tribune 65.0 NAApr-02 Eagle-Tribune Dow Jones - Essex County Newspapers 70.0 10.0 Apr-02 Lee Enterprises Howard Publications 694.0 11.5 Feb-02 Community Newspaper Holdings Dow Jones, 4 publications 182.0 13.0

Mean: 11.9x Median: 11.5x

19

“New Media” vs. “Traditional Media”—Historic Valuation Metrics

Source: CapitalIQ.

80.3x47.9x 40.2x 29.5x

12.5x11.6x 13.5x 9.3x 8.0x 6.8x

0.0x

50.0x

100.0x

2001 2003 2005 2007 2009

Average TEV/EBITDA

"New Media" Average "Traditional Media" Average

“New Media” includes:

Google, Yahoo, Apple

“Traditional Media” includes:

Gannett, Washington Post, New York Times

20

“New Media” vs. “Traditional Media”—Historic Valuation Metrics

Source: CapitalIQ.

“New Media” includes:

Google, Yahoo, Apple

“Traditional Media” includes:

Gannett, Washington Post, New York Times

Return on Assets

14.2%

12.3%

10.4%11.3%

6.1%

(2.9%)

7.7%6.9%

5.8%

2.8%

(4.0%)

(2.0%)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2001 2003 2005 2007 2009

"New Media" Average "Traditional Media" Average

In 2001, YHOO and AAPL both suffered 30-35% revenue declines Y/Y resulting from the macro tech environment. As a result, both companies suffered financial setbacks as reflected in their financial statements and financial ratios

21

Questions and Answers

22

Appendix

23

Circulation Revenue Continues to Decline

As total paid circulation continues to decrease, advertisers will continue to search for new mediums to reach consumers

• From 1998-2008, the Average Year/Year % Circulation Decline was 1.5% for Daily Papers and 2.0% for Sunday Papers

• From 1998-2008, the Total Circulation Decline was 15.6% for Daily Papers and 22.3% for Sunday Papers

Source: Editor and Publisher International Yearbook.

Total Paid Circulation

Year Morning EveningTotal

Newspapers Morning (000) Evening (000) Total (000) % Decline Total Newspapers Total (000) % Decline

1998 721 781 1,489 45,643 10,539 56,182 - 898 60,066 -

1999 736 760 1,483 45,997 9,982 55,979 -0.4% 905 59,894 -0.3%

2000 766 727 1,480 46,772 9,000 55,773 -0.4% 917 59,421 -0.8%

2001 776 704 1,468 46,821 8,756 55,578 -0.4% 913 59,090 -0.6%

2002 777 692 1,457 46,617 8,568 55,186 -0.7% 913 58,780 -0.5%

2003 787 680 1,456 46,930 8,255 55,185 0.0% 917 58,495 -0.5%

2004 814 653 1,457 46,887 7,738 54,626 -1.0% 915 57,754 -1.3%

2005 817 645 1,452 46,122 7,222 53,345 -2.4% 914 55,270 -4.5%

2006 833 614 1,437 45,441 6,888 52,329 -1.9% 907 53,179 -3.9%

2007 867 565 1,422 44,548 6,194 50,742 -3.1% 907 51,246 -3.8%

2008 872 546 1,408 42,757 5,840 48,597 -4.4% 902 49,115 -4.3%

Average Year/Year % Decline -1.5% -2.0%

Total Circulation Decline from 1998-2008 -15.6% -22.3%

Number of Daily and Sunday Newspapers

Daily Sunday

Tre

nd

Tre

nd

24

Circulation- Declines Since 2007

• Although circulation figures had been slowly falling for years, the pace of declines has increased rapidly since 2007

• Publishers have sought to fight against declining circulation revenue by increasing subscription and single copy prices significantly through 2008 and 2009

• While price increases have helped to stem circulation revenue losses , many publishers fear they are testing the upper bounds of how much loyal customers are willing to pay for a physical newspaper

YOY ChangeRank Newspaper Sep-09 Sep-08 Sep-07 2009-2008 2008-20071 Wall Street Journal 2,024,269 2,011,999 2,011,882 0.6% 0.0%2 USA Today 1,900,116 2,293,312 2,293,137 -17.1% 0.0%3 New York Times 927,851 1,000,666 1,037,828 -7.3% -3.6%4 Los Angeles Times 657,467 739,147 779,678 -11.1% -5.2%5 Washington Post 582,844 622,714 635,012 -6.4% -1.9%6 Daily News (NY) 544,167 632,595 681,415 -14.0% -7.2%7 New York Post 508,042 625,428 667,118 -18.8% -6.2%8 Chicago Tribune 465,892 516,031 559,402 -9.7% -7.8%9 Houston Chronicle 384,419 448,271 507,452 -14.2% -11.7%10 New York Newsday 357,124 377,517 387,498 -5.4% -2.6%11 Pheonix Republic 316,874 361,332 382,415 -12.3% -5.5%12 Minneapolis Star Tribune 304,543 322,358 336,697 -5.5% -4.3%13 Chicago Sun-Times 275,641 313,174 326,018 -12.0% -3.9%14 Plain Dealer (Cleveland) 271,180 305,528 334,195 -11.2% -8.6%15 Detroit Free Press 269,729 298,243 320,125 -9.6% -6.8%16 Boston Globe 264,105 323,980 360,696 -18.5% -10.2%17 Dallas Morning News 263,810 338,932 373,586 -22.2% -9.3%18 San Francisco Chronicle 251,782 339,430 365,234 -25.8% -7.1%19 Star-Ledger (Newark, N.J.) 246,006 316,281 353,005 -22.2% -10.4%20 Union-Tribune (San Diego) 242,705 269,820 278,176 -10.0% -3.0%

Top 20 Average Change -12.6% -5.8%

Source: JP Morgan Equity Research October 2009

25

Advertising Mix Continues to Shift• The adverting media mix has changed dramatically over the past 30 years

– In 1980, newspapers and magazines (“Print Media”) were the largest mediums, comprising 38% and 16%, respectively, of the overall advertising market, as compared to 16% and 10% in 2009

– Revenue for Print Media has decreased by approximately $29.0 billion (-41.3%) since 2000, while online media has increased by $14.9 billion (183.9%)

– Online media is now one of the largest mediums behind TV and newspapers, with 14% of the overall mix

The growth of online media is expected to continue in the future, potentially surpassing newspapers in 2010

– The trend toward online media is expected to continue in the future

($ in billions)

Medium 1980 % of Total 1990 % of Total 2000 % of Total 2009E % of Total

Newspaper $14.8 38% $32.3 34% $48.7 27% $25.6 16%

Radio 3.6 9% 8.8 9% 19.9 11% 14.0 9%

Magazines 6.1 16% 12.2 13% 21.6 12% 15.7 10%

National Broadcast/Syndicated TV 4.1 11% 9.2 10% 15.7 9% 15.1 9%

Local Broadcast TV (a) 4.4 11% 9.9 11% 17.8 10% 12.5 8%

Cable TV 0.1 0% 2.6 3% 12.2 7% 20.1 12%

Outdoor 1.0 3% 2.6 3% 5.2 3% 6.1 4%

Direct Mail 2.4 6% 8.6 9% 16.6 9% 19.2 12%

Directories 2.5 6% 7.7 8% 12.4 7% 10.7 7%

Other online media (b), (c) 0.0 0% 0.0 0% 8.1 5% 23.0 14%

Total $39.1 100% $93.9 100% $178.2 100% $162.0 100%

(a) Includes Political and Olympic spending, (b) Includes Lead generation, internet yellow pages, paid search and local online revenues, (c) Online revenues for each media are included in this line item.

Source: Brian Wieser, MAGNA, July 2009.

26

Media Industry—Financial Instability Led to Several Bankruptcy Filings in 2009

Company Name Assets Liabilities Filing date Company Description

Heartland Publications LLC 100.00$ 100.00$ 12/21/2009

Clinton, Conn.-based Heartland, a daily and weekly newspaper publisher primarily in the Southeast and Midwest regions, filed for bankruptcy because its revenue has steadily decreased as advertisers retreat from print products.

Canwest Global Communications Corp. 500.00 50.00 10/6/2009 Winnipeg, Manitoba-based newspaper and television media company.

Questex Media Group Inc. 100.00 100.00 10/5/2009 Newton, Mass.-based Questex Media, a trade magazine publisher.

Triple Crown Media Inc. 33.15 85.98 9/14/2009Lawrenceville, Ga.-based Triple Crown Media, a publisher of seven newspapers.

Freedom Communications Holdings Inc. 757.00 1,077.00 9/1/2009Irvine, Calif.-based Freedom Communications, a newspaper publisher and television station operator.

Reader's Digest Association Inc. 2,200.00 3,400.00 8/24/2009Pleasantville, N.Y.-based Reader's Digest, a multi-brand media and marketing company.

Columbian Publishing Co. 8.46 10.00 5/1/2009Vancouver, Wash.-based Columbian Publishing, which publishes The Columbian daily newspaper.

American Community Newspapers LLC 50.00 100.00 4/28/2009 Addison, Texas-based American Community, a newspaper publisher.

Sun-Times Media Group Inc. 479.00 801.00 3/31/2009Chicago-based Sun-Times Media Group, the owner of the Chicago Sun-Times newspaper.

Philadelphia Newspapers LLC 333.69 432.48 2/22/2009Philadelphia-based Philadelphia Newspapers, which publishes the Philadelphia Inquirer and Philadelphia Daily News.

Journal Register Co. 142.18 706.27 2/21/2009Yardley, Pa.-based Journal Register, a newspaper owns 20 daily newspapers and more than 150 other publications.

Star Tribune Holdings Corp. 493.20 661.10 1/15/2009Minneapolis, Minn.-based Star Tribune Holdings, publisher of the Minneapolis Star Tribune which is Minnesota’s largest newspaper and ranks 15th nationally by daily circulation.

($Millions)

27

Growing Trend Toward Advertising on the Internet

As stated above, total U.S. Internet advertising as a percentage of total U.S. advertising is estimated to increase from 7.6% in 2007 to 12.6% in 2012

The main reason for the migration of advertising dollars from traditional media to the Internet:

• The Internet allows advertisers to deliver their market communication messages to their target audiences in the most effective, timely, and cost-efficient way with a high degree of measurability

Source: Universal McCann; IAB & PricewaterhouseCoopers; Collins Stewart LLC estimates.

28

Response to the Current Market: in their own words

– Excerpted from the Reader’s Digest Disclosure Statement:

– “The debtors and their predecessors have been at the forefront of the highly-competitive media and direct marketing industry for more than 80 years and, as a result, have engendered strong brand loyalty among their customers and established substantial credibility among distributors, marketing partners and competitors. The Debtors also recognize that the traditional publishing supply chain is evolving, in some cases rapidly, to keep pace with the digitalization of popular culture. As more and more consumers access media through digital channels, the Debtors’ online presence has grown commensurately. With 65 branded websites and strategic allegiances with leading Internet destinations, the Debtors believe they are uniquely able to capitalize on their iconic heritage and trusted brands, and leverage their media and marketing expertise to expand into multi-platform brands in the medium that best suits the “networked generation.”

– “Through expanded digital investments and the development of new mobile, video and multimedia applications, including rolling out a new suite of products under the “Reader’s Digest Version” banner, the Debtors are well-positioned to satisfy the growing consumer preference for on-demand, easily digestible content in a flexible format (e.g., accessible, quick-hit content delivered through new media channels such as social networks, blogs and tags) and expand market penetration and grow brand equity in a new, younger consumer market.”

29

“New Media” vs. “Traditional Media”—Current Valuation Metrics

Source: CapitalIQ.

LTM

Dec-31-2009A (1)

LTM

Dec-31-2009A (1)LTM

Dec-26-2009A

Company Google Yahoo Apple Average

TEV/EBITDA 14.6x 12.0x 10.8x 12.5xP/BV 4.7x 1.7x 4.9x 3.8x

Return on Assets % 14.4% 2.2% 17.3% 11.3%Return on Equity % 20.3% 5.0% 31.9% 19.1%

Total Debt/Equity NA 0.7% NA 0.7%Total Liabilities/Total Assets 11.1% 16.4% 33.7% 20.4%

LTM

Dec-27-2009A (1)LTM

Sep-27-2009ALTM

Sep-27-2009A

Company Gannett Washington Post New York Times Average

TEV/EBITDA 6.0x 6.7x 7.8x 6.8xP/BV 2.3x 1.4x 3.4x 2.4x

Return on Assets % NA 2.4% 3.3% 2.8%Return on Equity % 29.2% 1.0% (6.7%) 7.8%

Total Debt/Equity 240.3% 13.9% 187.4% 147.2%Total Liabilities/Total Assets NA 43.5% 84.4% 63.9%

Notes:(1) Financial information taken from company press release.

"Traditional Media"

"New Media"

VALCON 2010 Restructurings and the Media Sector

Documents

Transcript of VALCON 2010 Restructurings and the Media Sector