Thomson Newspapers – Part II
TNL was one of the great rollups of the 20th century. From 1950 to 1988, TNL compounded EPS at 20% per year while also paying out a lot of dividends along the way.
For background about Roy Thomson and Thomson Newspapers up to 1952, read Thomson Newspapers – Part I.
Thomson Newspapers 1953 – 1989: The “Golden” Ken Thomson Years
The 1965-1998 period is interesting as a case study as (1) the intelligent-fanatic founder has passed the reins on to professional management and (2) we have a good amount of data to reconstruct its lifecycle from rapid expansion to decline.
We’ll split the expansion period into three parts. Where to make the cuts is far from scientific, but it does a good enough job of capturing “when things had changed”.
1965-1975
The first decade post IPO was a period of attractive acquisition multiples. Gannett, which IPO’d in 1967, was only the third U.S. newspaper company to go public and Wall Street considered newspapers to be a bad business at this point in time due to the recent memory of the 1963 newspaper strike in Manhattan. Gannett produced good results and won over Wall Street. Its share price rose in tandem and Paul Miller used his shares as acquisition currency to buy papers at a rapid clip. Success invites imitation – another twelve newspaper companies went public between 1969 and 1973, replicating what worked for Gannett. Even so, there were still in the neighborhood of 700-800 independent newspaper companies by 1975, or about 40% of all U.S. newspapers, enough to feed the acquisitive chains.1
More relevant during this period were the prodigious economics of the newspaper business. To quote Buffett:2
“The economics of a dominant newspaper are excellent, among the very best in the business world. Owners, naturally, would like to believe that their wonderful profitability is achieved only because they unfailingly turn out a wonderful product. That comfortable theory wilts before an uncomfortable fact. While first-class newspapers make excellent profits, the profits of third-rate papers are as good or better - as long as either class of paper is dominant within its community.”
TNL’s pre-tax return on tangible invested capital rose steadily during this period, from ~40% at the time of the IPO to ~100% by 1975.
TNL far exceeded the economics of its peers. While we couldn’t get our hands on annual reports of competing chains at the time, here’s an excerpt from The Thomson Empire (published in 1986):
“[TNL had the] highest margins among North American newspaper and magazine chains, ranging from 25 percent in boom economic times to 14 percent during the recent recession. Its low point is equal to the highs reached by most other Canadian and U.S. newspaper organizations. Its profit margins surpass those of both Southam, Canada's largest newspaper chain in terms of circulation, and the Gannett chain, the largest in the U.S.”
This reminds us of Mark Leonard’s study of high-performance conglomerates in which he mentions a similar evolution among the companies he analyzed:
“Subsequently their returns experienced a period of dramatic improvement as they refined their operating methods and philosophies. These operating methods varied, but generally involved techniques for the detailed measurement of business processes coupled with relentless incremental improvement.”
TNL’s performance was the result of (1) an industry with fantastic economics, (2) TNL’s presence in the most attractive markets (small towns where it had a monopoly position), and (3) a business that was run exceedingly well.
1976-1982
There were now a lot of chains competing for deals. Wall Street analysts, in classic fashion, added fuel to the fire:3
“Once public, Wall Street's security analysts began exerting considerable pressure on these firms to grow. Executives at these firms therefore spawned what would become an all-out acquisitions frenzy.”
A few excerpts from a 1977 NYT article:4
The latest trend, according to industry sources, is that groups are now gobbling up other groups. The most notable of these acquisitions last year was Newhouse's bidding victory over the Times Mirror Company for the purchase of Booth Newspapers, publishers of eight Michigan dailies and a Sunday supplement, Parade.
Publishers are generally looking for small‐to‐medium sized monopoly papers in growing towns.
There are no set formulas for what newspaper groups are willing to pay for new acquisitions. According to Mr. Hills of Knight‐Ridder [one of the largest U.S. chains], under the old rules some years ago, chains were willing to pay from 10 to 25 times earnings. Lately, however, the intensity of the bidding has driven prices up so that some of the chains have gone as high as 30 to 40 times net earnings or sometimes as high as four times revenues.
On the surface this does not sound good for TNL. Of course, these multiples were based on underperforming earnings due to the mismanagement by publishing families. While multiples had gone up, the chains had also gotten a lot better at boosting those earnings post acquisition.
After bringing acquired papers to its company-average margin, it appears that the earnings multiples paid by TNL did not materially trend up during this period. ROIC remained very strong, especially considering the high reinvestment into M&A. The decline in ROTIC was related to the 1980 acquisition of FP Newspapers (owner of the Globe & Mail and other large Canadian papers), a turnaround at the time, as well as the early 1980s recession rather than due to a structural deterioration of business fundamentals.
For an investor in 1982, taking refuge in the stable ROIC would, however, have been rear-view-mirror investing. Worrisome was that, by 1982, chains controlled something like 65-70% of all daily newspapers in the U.S. while the industry’s need to please Wall Street continued unabated.
Another aspect we find noteworthy about TNL’s evolution up to this point is that it did not scale M&A transaction volume particularly well. TNL never got much above 7 newspaper acquisitions per year (implying fewer deals as acquired companies increasingly owned more than 1 paper) which is relatively uninspiring. Here is TNL (orange) benchmarked against the companies from our Serial Acquirers post:
We find this curious given the formulaic approach that TNL had developed for acquisitions and the homogenous nature of what it was acquiring – together, a recipe for a far faster acquisition pace. It appears that the bottleneck was the insistence of TNL’s executives to maintain control over the M&A process.5 Also, the company, on average, had a 40% payout ratio throughout its life as a public company.
1983-1989
Chains owned ~70% of all U.S. dailies by 1983. An analysis of data at the time would’ve told an investor the following:
There were many other rollups, such as Park Communications, explicitly focused on small-town newspapers,
Many of the top 20 chains hunted within the “10,000 to 100,000 circulation per paper” range that was one of TNL’s acquisition criteria (see orange dots in red box below), and
In classic Darwinian nature, more aggressive rollups emerged such as “Lean Dean’s” MediaNews (using more leverage, cutting costs more aggressively etc.)
Newspapers had also regained their “compounder” status after some short-lived doubts. NYT’s 1986 “Newspaper Properties Hotter Than Ever” article explains as follows:
“Several years ago, newspapers were viewed by some of their owners as the dinosaurs of the media industry. Cable television, the free shoppers and the new electronic information technologies seemed certain to siphon off readers and advertisers. Nervous publishers were eager to diversify. Today that attitude has changed. Videotex has flopped, cable TV has failed to become a major competitor for advertising, and publishers everywhere have gotten into shoppers, printing and delivering the ad-laden throwaways themselves. ‘Newspaper companies are realizing that their basic business remains the most attractive of all reinvestment alternatives,’ says Joseph Fuchs, a media analyst at Kidder, Peabody.”
This brings us to the expiration date of serial acquirers – the inevitable escalation of market multiples.
“The chain has not had problems acquiring papers because, while it holds the line on salaries, it willingly pays top dollar for the papers themselves. It has rarely been rejected…”6
Two potential problems are: (i) a general increase in the market multiple, and (ii) competitors closing the gap in terms of the synergies they can achieve.
Few newspaper companies could match TNL’s cost efficiency – its EBT margin of ~30% far exceeded the newspaper industry’s 17% in 1988. However, other rollups were willing to use far more leverage and market multiples had escalated so much that even TNL had to pay 20-30x P/E after synergies.
What about the revenue side? From the available data, it does not appear that TNL was taking more pricing than the rest of the industry. Newspapers were a business with incredible pricing power and everyone eventually learned how to tap it. Our data suggest that TNL was a far faster learner than its peers but that the industry closed the gap with TNL by the ‘80s as chains had vacuumed up most of the independents.
The two ways we know of for serial acquirers to scale while delaying mean reversion of ROIC are:
Expand the funnel of opportunities they’re looking at (more “hunters” looking for deals in the existing geography; going into new geographies; going into new verticals etc.) to find below-market-multiple opportunities. Scale transaction volume rather than transaction size by pushing capital allocation down the organization since market multiples for smaller deals are lower than market multiples for larger deals. The poster child for this approach is CSU.
Keep capital allocation more centralized and scale by buying larger companies rather than more companies but have some secret sauce that allows them to boost earnings far more than any other acquirer could. The poster child for this approach is TDG.
As we explained, TNL did not pursue (1). It pursued (2) with its secret sauce on the expense side but this was not enough to entirely escape the industry’s irrational exuberance of the 1980s. It could not pursue (2) on the revenue side as it was too easy for its peers to tap the pricing power as well.
What we find interesting when comparing TDG to TNL is that TDG shines in all three areas:
It is very similar to TNL on the expense side.
It leverages its acquisitions aggressively unlike TNL (of course this has to be done within reason).
On the revenue side, the underlying aerospace businesses do not lag newspapers-of-the-past much in terms of pricing power but unlocking the pricing power is far more difficult. You first have to stand your ground against Michael Corleone (aka Airbus and Boeing) and nobody can pull this off quite like TDG. This allows TDG to buy an asset from someone as big as Honeywell and still materially expand margins.
As we can see in the chart above, while ROTIC improved materially throughout the 1980s as improvements took hold at FP Newspapers and the U.S. emerged from recession, ROIC dropped steadily in the second half of the 1980s as acquisition multiples skyrocketed. Chain ownership ca. 1988 was in the mid 70% range and TNL had just spent ~$700m on acquisitions in 1987 and 1988 combined, or ~160% of FCF (a far higher percentage than in any other 2-year period over the preceding 19 years). 1988 marked the year of peak EBITA for TNL.
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To summarize TNL’s performance up to this point: net income compounded at 20% from 1950 to 1965 with minimal, if any, share issuance (as much pre-IPO data as we have). TNL continued to compound EPS at 20% from 1965 to 1988. Take a moment to appreciate those numbers - that’s an astonishing 38 years of compounding EPS at 20%! $1 of EPS turned into ~$1,000 by the end (by the way, TNL paid a lot of earnings out as dividends along the way!).
Thomson Newspapers 1990 – 1994: “From Franchise to Good Business”
1990 was the year of Buffett’s prophecy about the future of the newspaper industry. In 1991, he doubled down on his warning.
1990 shareholder letter (emphasis ours):
“Charlie and I were surprised at developments this past year in the media industry, including newspapers such as our Buffalo News. The business showed far more vulnerability to the early stages of a recession than has been the case in the past. The question is whether this erosion is just part of an aberrational cycle - to be fully made up in the next upturn - or whether the business has slipped in a way that permanently reduces intrinsic business values.
While many media businesses will remain economic marvels in comparison with American industry generally, they will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago.
The reason media businesses have been so outstanding in the past was not physical growth, but rather the unusual pricing power that most participants wielded. Now, however, advertising dollars are growing slowly. In addition, retailers that do little or no media advertising (though they sometimes use the Postal Service) have gradually taken market share in certain merchandise categories. Most important of all, the number of both print and electronic advertising channels has substantially increased. As a consequence, advertising dollars are more widely dispersed and the pricing power of ad vendors has diminished. These circumstances materially reduce the intrinsic value of our major media investments… though all remain fine businesses.”
1991 shareholder letter (emphasis ours):
“In last year's report, I stated my opinion that the decline in the profitability of media companies reflected secular as well as cyclical factors. The events of 1991 have fortified that case: The economic strength of once-mighty media enterprises continues to erode as retailing patterns change and advertising and entertainment choices proliferate. In the business world, unfortunately, the rear-view mirror is always clearer than the windshield: A few years back no one linked to the media business - neither lenders, owners nor financial analysts - saw the economic deterioration that was in store for the industry. (But give me a few years and I'll probably convince myself that I did.)
The fact is that newspaper, television, and magazine properties have begun to resemble businesses more than franchises in their economic behavior. Let's take a quick look at the characteristics separating these two classes of enterprise, keeping in mind, however, that many operations fall in some middle ground and can best be described as weak franchises or strong businesses.
An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital… Until recently, media properties possessed the three characteristics of a franchise and consequently could both price aggressively and be managed loosely.
Now, however, consumers looking for information and entertainment (their primary interest being the latter) enjoy greatly broadened choices as to where to find them. Unfortunately, demand can't expand in response to this new supply: 500 million American eyeballs and a 24-hour day are all that's available. The result is that competition has intensified, markets have fragmented, and the media industry has lost some - though far from all - of its franchise strength. The industry's weakened franchise has an impact on its value that goes far beyond the immediate effect on earnings…
A few years ago the conventional wisdom held that a newspaper, television or magazine property would forever increase its earnings at 6% or so annually and would do so without the employment of additional capital… Therefore, reported earnings (before amortization of intangibles) were also freely-distributable earnings, which meant that ownership of a media property could be construed as akin to owning a perpetual annuity set to grow at 6% a year…
Dollars are dollars whether they are derived from the operation of media properties or of steel mills. What in the past caused buyers to value a dollar of earnings from media far higher than a dollar from steel was that the earnings of a media property were expected to constantly grow (without the business requiring much additional capital), whereas steel earnings clearly fell in the bob-around category. Now, however, expectations for media have moved toward the bob-around model… valuations must change dramatically when expectations are revised.”
Spoiler alert – transitioning from franchise to good business is not pretty. You suddenly have to become competitive which requires lots of investment. Of course, in a perfect world, the higher investment would have started a long time ago and been somewhat gradual. That’s if management had reacted with extraordinary foresight (TV started consistently taking ad share from newspapers in the 1950s but newspapers were still running mostly black and white ads by the late 1980s for example). But just as investors take too much signal from stock prices, management teams take a lot of signal from the short-term trajectory of organic revenue growth. Once the level of organic growth changes sufficiently, denial gives way to acceptance and the approach taken by management can change radically. This in turn is a rude awakening to investors who had been taking management’s reassuring words as gospel. Altria paying $30b to acquire Juul and Altice overbuilding its HFC network with fiber are two recent examples of this. (It works the other way around as well, as we’ve seen with plenty of eCommerce companies over the last few years which took a couple years of faster revenue growth as a signal to invest as if the end of brick-and-mortar commerce was near.)
Newspapers’ advertising rate increases slowed down from 8% in 1987 to 5% in 1988 to 3% in 1989. In real terms, growth decelerated from 4% to 1% to -1.5%. In late 1988, the NYT reported on the “slump in local retail advertising”. While the industry was used to having little-to-no volume growth, the weakening pricing power of their local advertising business was unacceptable. At the industry’s 1989 “Conference on the Outlook for the Media”, the message was that investments would have to be made to reignite advertising growth. With this context in mind, let’s look at The Thomson Corporation (TTC). TTC brought in a new executive in 1989, Mike Johnston, to take over TNL. Mike definitely didn’t screw around. “Among his first acts was a top-to-bottom review of the competitive situation of all 198 newspapers. ‘We tried objectively to analyze their strengths and weaknesses,’ he says. ‘And where we've identified weaknesses, we've made an aggressive effort to correct them.’” What does “an aggressive effort to correct” look like? TNL’s ROA crashed from ~30% in 1987 to <10% in the 1990s! An unwelcome surprise for investors.
TNL finally conceded that editorial content had to be improved (a long-standing accusation by critics), equipment needed upgrading (more colour and greater efficiency), and more marketing was required. From the 1989 TNL AR:
Back to our comment that executives take a lot of signal from changes in organic growth. The deterioration of the newspaper franchise had been a long time in the making. The industry did know about it (e.g. the 1986 NYT article quoted earlier) but a buoyant mid-1980s economy with solid real-GDP growth had lulled everyone back into a false sense of security as advertising rates kept rising (newspapers were skewed to classified ads such as job postings, real estate and automotive. This is the most cyclical part of the ads market which benefits disproportionately during a strong economy). Underneath the surface, these were the long-standing adverse trends:
TV started taking ad share in the 1950s7. TV took a lot of national ad share from newspapers.8
Newspapers’ overall ad share losses (national + local + classified) had resumed in the mid 1970s.
Free newspapers and “Shoppers” started popping up already before 1980 (a global phenomenon that was particularly acute in the UK), undercutting paid-for daily newspapers on local ads.
Discounters had been taking share from department stores for a while and were far less profitable for newspapers.
The slowing economy of the late 1980s turned into a deep recession in 1990-1992. Of course, advertising rates got pressured even further. Suddenly, the issues everyone knew about in the back of their minds were given more credence again. The NYT reported the following in 1991:
“the majority view [among newspaper executives] seems to be that the drop in newspaper advertising is partly cyclical, reflecting the downturn in the overall economy, and partly structural, reflecting a fundamental change in the advertising business in which newspapers have been the losers. These structural changes include growing competition from rivals like cable television and advertising cutbacks by big department stores because of the consolidation in the retailing industry.”
However, when the economy rebounded in the mid 1990s and advertising rates resumed their rise, this narrative once again moved into the background. Buffett would later go on to say that “newspaper properties, moreover, continued to sell as if they were indestructible slot machines. In fact, many intelligent newspaper executives who regularly chronicled and analyzed important worldwide events were either blind or indifferent to what was going on under their noses.”9
The Thomson Corporation post Newspapers
TTC disposed of its North American newspapers between 1995 and 2001 at decent multiples, though far below what it paid during the exuberant 1980s (11-12x TTM EBIT on the biggest sale in 2000).
When Roy went to the UK and formed ITOL, Gordon Brunton was his key lieutenant. Brunton got ITOL into book publishing back in the 1960s. They made a ton of mistakes but had learned by the 1980s that specialist B2B publishing (e.g. law, accounting and finance) was another market with pricing power and good growth – the thesis was that this would be their newspapers 2.0.
Michael Brown was Brunton’s protégé and took over TTC when ITOL and TNL merged in 1989. He applied those learnings and continued to push TTC further into B2B information services. It was a pretty good idea but Brown had forgotten a cornerstone of Roy’s thesis: “at a price reasonably related to cash flow”. Brown instead took the approach of: “It is difficult to overpay for a good company.”10
TTC plowed a lot of FCF into acquisitions at healthy multiples. One example:
“Take last year's acquisition of Associated Book Publishers for $340 million -- three times the share price before the legal and textbook publisher went into play.”11
The mean reversion of ROIC was dramatic. Here are TNL as well as TTC benchmarked against the serial acquirers from our previous post.12
(An interesting sidenote is that TNL, at its EBITA peak in 1988, benchmarks very similarly to CSU in 2019. Adjusted for inflation: similar size in terms of EBITA, similar 5-year M&A spend, close in terms of ROIC + ½ org growth. While CSU has a far more sustainable M&A process than TNL ever had, it is always worthwhile knowing the base rates.)
Despite its great foresight and timely pivot, TTC, just like almost all other old newspaper companies, went on to underperform the S&P500 over the ensuing 2.5 decades. While the outcome was good for the family13, it was mediocre at best for minority shareholders.
TTC acquired several hundred information services businesses between 1990 and 2014. This was TTC’s empire building period – most notable was the $17b acquisition of Reuters in 2008. From 2009 to 2014, organic growth averaged 0% despite the hefty valuations paid for supposedly high-quality assets. The outcome was that TTC entered portfolio restructuring mode in 2013/ 2014.
After the deconsolidation of its Finance & Risk segment in 2018 (partial sale to Blackstone which created Refinitiv), TTC’s EBITA as of 2019 was back to its level in 1986 (adjusted for inflation)!
Takeaways
Some takeaways, in no particular order and not an exhaustive list:
Beware of linear extrapolation: most business models have an expiry date and roll-ups eventually end up in portfolio restructuring mode. Secular is really a euphemism for “longer-than-average cyclical”. In the end, capitalism is pretty brutal.
Do not take too much signal from organic growth alone without understanding the trends of its components: newspapers lost a lot of national ad share to TV and therefore doubled down on their local advertising pricing power. This not only masked deteriorating market share for many years (i.e. organic growth continued to look good) but also made alternative local advertising mediums ever more attractive (such as “Shoppers”, direct mail, local TV, magazines, radio). Think about what the key trends in the industry are (e.g. newspapers’ share of total ad spend) and then collect data to track these key trends and form your thesis. If we remember correctly, Alice Schroeder mentioned in the Snowball that this is Buffett’s approach (something along the lines of ‘there are only a handful of drivers that really matter for a business. Once you figure them out, collect as much historical data about them as possible’). To be fair, even Buffett didn’t catch the deterioration of the newspaper business until 1990 - certain changes are too tough to spot and mistakes are bound to happen.
Management has cognitive dissonance too: the switch from denial to acceptance can often lead to drastic changes in how the business is run. As an investor, you may model in a juicy FCF yield based on “business-as-usual” spending just to be informed by management that all FCF over the foreseeable future will now instead be reinvested to future-proof the business (at questionable ROIC). Strongly decelerating revenue growth raises agency costs.
What’s the serial acquirer’s secret sauce: if the underlying businesses are good (e.g. newspapers, VMS, aerospace aftermarket), a lot of imitators will emerge over time. A secret sauce on the expense or revenue side can delay the inevitable mean reversion of ROIC by many years. Identifying the existence of a secret sauce and its sustainability is a key insight.
Track how much runway is left for the roll-up: companies can’t take the foot off the pedal once Wall Street has gotten hooked on fast growth. Eventually, this leads to brutal bidding wars and ROIC that comes down fast. Even a secret sauce can only protect you so much as consolidation increases.
Finding a new expansion pasture is extremely difficult: the fact that a multi-billion-dollar serial acquirer had a great run in its industry is the result of a massive coin-flipping contest with infinitesimal odds (having ended up in this industry and then having succeeded. Think about how long it took Roy). It’s a happenstance of history that is unlikely to be repeated by the management team (who most likely weren’t even the fanatical founders to begin with). Many nascent but fast-growing industries never yield good returns for their participants. On the other hand, growing and proven industries (i.e. past the nascent stage) will have plenty of incumbents with advantages over a new entrant – acquiring one of these companies will certainly not come cheap. In summary: once the existing roll-up is out of steam, don’t bank on a continuation of above-average ROIC on incremental capital (same industry but new geography, same geography but new industry, new geography and new industry could all be a “new” expansion pasture overestimated by management).
Valuations matter: the experience of TTC is a lesson for the inner “compounder-bro” in all of us.
Chain Building: The Consolidation of the American Newspaper Industry, 1953-1980. By Elizabeth Neiva.
1984 Berkshire shareholder letter.
https://thebhc.org/sites/default/files/beh/BEHprint/v024n1/p0022-p0026.pdf
https://www.nytimes.com/1977/02/15/archives/more-newspapers-change-hands-with-the-role-of-chains-increasing.html?searchResultPosition=21
Russell Braddon’s biography implies that it was mainly carried out by St. Clair McCabe with the help of J.J. Stephenson and John Tory.
Book: The Thomson Empire
Good data on Galbi’s blog: https://www.galbithink.org/ad-spending.htm
An illustrative example: “I've been a strong believer in newspapers,” says Dean Bair, senior marketing executive at the Campbell Soup Company. “But let me tell you, it has been an uphill battle. Newspaper advertising is hard work. It isn't easy to run a national campaign in newspapers. It is easy to run a television campaign.” “You just make one commercial,” he says. “All you do is take it over to the network and it runs everywhere. It doesn't work that way for newspapers. You have to send that material to every newspaper you want to run that ad in - that's a lot of materials and labor cost. Agencies are in business to make money, and when it's that tough, it's costly.” - Newspapers race against TV for advertising dollars, 1988
2006 Berkshire shareholder letter
An actual quote of Brown’s but we don’t remember the source. Possibly from The Thomson Empire
Forbes – “Profits by the Numbers”, 1988
For the serial acquirers, we’re still using the same 2019 data that we used in our Serial Acquirers post rather than 2021 data. Data for TNL and TTC are inflation adjusted, including the org growth (actual org growth minus any U.S. Urban CPI inflation above 2%; for comparability to 2019).
The Thomson family owned ~70% of TTC at this point and was one of the richest families in the world. One would assume their goal was multi-generational wealth preservation rather than alpha over the S&P500.
Thank you for the detailed work. Wonderful read. Do combine it with CSU & TDG letters.