by Ann Lallande
The author is an Annapolis, Md., free-lance writer.

On the Chinese calendar, 2000 was the Year of the Dragon. In the business of buying and selling newspapers, it was the Year of the Cluster. The value of the deals closed over the past 12 months exceeded $15 billion, more than double that of the previous record of $6.2 billion in 1997. The activity driving these deals, says Phil Murray of Dirks, Van Essen & Murray, in Santa Fe, N.M., is clustering.

Clustering is the art of buying newspapers in close geographic proximity; consolidating management, sales, and production processes; and developing revenue-generating synergies. It is the art of making two plus two equal five in revenues. But the endgame for most companies engaged in clustering is getting big enough to stay competitive and to reinvest savings in a better product, making a newspaper a more attractive advertising buy.

In its study of the clustering trend, Dirks, Van Essen & Murray defined clusters as dailies in adjacent counties, though clusters exist in all kinds of permutations. In 1990, only 19 percent of all the nation’s dailies operated in clusters, but as of October 2000, 35 percent of the nation’s 1,483 dailies were part of clusters (see related story).

The increase becomes even more impressive when measured by circulation. In 1990, 5.6 million daily customers bought papers that belonged to clusters. Now, 9.7 million buyers, or 70 percent more people than 10 years ago, read newspapers published in clusters.

“Yes,” observes Gary B. Pruitt, president and chief executive officer of The McClatchy Co. in Sacramento, Calif., “clustering is all the rage.”

Nevertheless, executives harbor other motives for buying newspapers. Tribune Co.’s $8 billion acquisition of the Times Mirror Co. last year was aimed at clustering diverse media in the nation’s top markets. McClatchy’s management is banking on a strategy of geographic diversity to temper the revenue impact of regional economic cycles. At Paxton Media Group Inc. in Paducah, Ky., circulation size tops the list of considerations when evaluating an acquisition. And managers at Cox Newspapers Inc. in Atlanta, the Evening Post Publishing Co. in Charleston, S.C., and Freedom Communications Inc. in Irvine, Calif., all consider a variety of factors in newspaper deals, including geography, performance, market potential and chemistry.

Stasis is not an option for cash-rich daily newspaper companies. “When newspapers do well and have cash balances,” observes Kevin M. Lavalla, managing director of newspaper publishing for Veronis, Suhler & Associates in New York City, “they’re either going to pay taxes, buy out shareholders, or make acquisitions.”

SHOPPING STRATEGIES
Ready capital and cash aplenty make newspaper sales simple and straightforward (see Line Item). The cash-averse can turn to swaps. “Some companies don’t want cash,” says Jonathan Segal, president of the Community Newspaper Division of Freedom. “They just want to improve their portfolios.”

Click to enlarge.

With stiff competition from the Internet and every other media quarter, newspaper companies struggle to strike a successful balance not just among their newspaper properties, but also among their print, Internet and broadcast investments. For example, the relaxation of common-ownership rules for radio stations means that ownership in some markets may dwindle from as many as 10 companies to as few as two. As a result, station owners can offer advertisers packages containing a whole spectrum of demographics, from fans of rock-and-roll to easy listening to classical music. Forming a cluster of newspapers to reach a broader audience helps thwart that competitive threat, says Murray.

The same principle applies when the threat takes the form of a large metro daily. Hollinger International Inc. employs clustering to compete with the Tribune Co. in Chicago. The owner of the Chicago Tribune also owns a TV station, cable channel and radio station in Chicago. Hollinger, owner of the Sun-Times, is expanding its presence in the market by buying clusters of suburban dailies and nondailies. Similarly, in Boston, The Boston Herald strengthened its hand against The Boston Globe by acquiring Community Newspaper Co. and its stable of 87 weeklies and four evening dailies in the suburbs that flank Boston (Presstime, Dec. 2000, p. 8).

But clustering offers more than a defensive position. Freedom Communications uses clusters as its entrŽe to metro markets. “We’re very happy to compete with larger metro newspapers by owning suburban daily newspapers on the fringe,” says Samuel C. Wolgemuth, Freedom’s president and CEO.

Last August, Freedom acquired what used to be Thomson’s Arizona strategic-marketing groups. One SMG sidles up to the east and the west of the Arizona Republic’s franchise in Phoenix. This cluster includes The Tribune in Mesa (morning, circulation 98,978), the Daily News-Sun in Sun City (evening, 21,506) and one weekly. The other SMG, in Yuma, is composed of The Yuma Daily Sun (evening, 14,713) and two nondailies. The combined circulation of the three dailies is 135,197.

In a similar vein, Freedom is taking up residence outside St. Louis. In October, it acquired The Telegraph (morning, 26,629) in Alton, Ill., which came bundled with two nondaily publications and a monthly real-estate book. Wolgemuth says that package “is a key addition” to a developing cluster that includes the Jacksonville (Ill.) Journal-Courier (morning, 14,366) about an hour away.

Click to enlarge.

ox Newspapers Inc., says Brian G. Cooper, senior vice president, has been clustering newspapers since

1903, whCen it acquired the Springfield (Ohio) News-Sun (morning, 31,876) as a companion to the Dayton Daily News, 25 miles away. To this day, Cox “continues to look for newspapers that make sense geographically,” says Cooper.

Last summer, the company announced it would buy Thomson’s Southwest Ohio SMG, which includes two dailies—the Middletown Journal (morning, 21,492) and the Journal-News in Hamilton (morning, 23,952)—and 12 weeklies. “Basically, every acquisition over the last five years has been very much focused on properties surrounding something that we currently own,” Cooper explains.

David M. Paxton, president and CEO of Paxton Media Group, says his company focuses on more than clustering but takes greater interest in a newspaper property if Paxton owns other papers near by. The proximity “presents opportunities to operate more efficiently either by coordinating marketing activities or combining production or back-office operations.”

Paxton purchased The Herald-Palladium, a 29,677-circulation evening daily in Benton Harbor-St. Joseph, Mich., Oct. 1 because it was already operating The News-Dispatch (morning, 12,773), a weekly and several TMC products less than 50 miles away in Michigan City, Ind. “We saw opportunities on the revenue and operational side,” says Paxton. Specifically, he envisions cross-selling advertising. Circulation for the two Paxton dailies totals about 45,000. The cluster has about 35,000 weekly buyers, and shoppers reach some 145,000 households. The combined circulation tops 200,000. Area advertisers have the option of buying any one publication separately, as part of a package, or the entire kielbasa.

MAKING IT PAY
Simply owning several newspapers in a region or state does not necessarily create a cluster. When distances are too great, says McClatchy’s Pruitt, “the efficiencies of a cluster are not compelling, and the advantages of clustering are overblown.”

Larry Mayo, vice president and Texas Division manager for Birmingham-based Community Newspaper Holdings Inc., knows about this fine balance firsthand. From Palestine, Texas, Mayo manages 21 newspapers, most of them acquired nearly two years ago. For the past year, Mayo and his team have been working at getting six dailies and one twice-weekly in and near Palestine to jell as a cluster (see sidebar).

Clustering goes beyond geography to application. Freedom, for example, owns newspaper groups in Orange County, Calif.; along the Texas-Mexico border from McAllen to Brownsville; on the Florida Panhandle from Fort Walton to Panama City; and in eastern North Carolina. Nevertheless, Freedom’s Segal considers the company a neophyte when it comes to creating cluster synergy. “We are just starting to take baby steps,” he says.

Freedom is evaluating how its clustered papers might consolidate accounting functions, share editorial resources and cross-sell advertising. Freedom’s most significant initiative to integrate back-office operations is under way in eastern North Carolina. “We’re trying to marry our acquisition strategy with our operational strategy,” Segal says. “To the extent that we can, it’ll give us extra bang for our buck.”

For CNHI, clustering provides the best model for newspaper management. Of the company’s 113 dailies, 60 fall into 18 clusters. In September, CNHI acquired 17 dailies in several clusters from Thomson, and in November, five dailies plus several weeklies from Hollinger. At the same time, it announced the sale of the Chadron (Neb.) Record and the Hot Springs (S.D.) Star because they did not fit into clusters. “Those two weeklies were isolated from the rest of CNHI,” says Michael E. Reed, president and CEO. “There were no dailies around to roll into a cluster, and we didn’t see the company growing into that part of the country.”

CNHI is committed to clusters, explains Reed, “because through them, we are able to improve the operations of our newspapers and enhance the quality of the product for both readers and advertisers.”

When Paxton buys neighboring papers, it tries to combine operations. In a couple of cases, it has consolidated printing plants into one site and invested in a larger press. The new press provides greater flexibility, more color and better print quality. The integration generates savings that can be reinvested.

“Sometimes, we have the opportunity to upgrade the quality of the editorial product,” says Paxton, “by investing in equipment and people.”

Integration faces some limits, however, especially when it comes to sharing editorial resources. In certain circumstances, clustered newspapers may coordinate event coverage, but CNHI’s Reed says this creates a slippery slope. “I firmly believe in local, local, local.” Editorial decisions and reporting must remain locally driven and based on the common wants and needs of the readers, he insists. “If you start trying to hand-feed information to the readers, you will loose your core business.”

What is more, imposing synergies may not serve the best interest of the publications. Paxton owns the Paragould (Ark.) Daily Press (morning, 6,450) and in October completed purchase of The Jonesboro (Ark.) Sun (morning, 27,049) in an adjacent county. In this instance, synergy is not what the company wants, says David Paxton, but rather the opportunity to grow the Sun by applying the business practices Paxton has honed over the years.

SEPARATE STRATEGIES
Not all newspaper companies have been swept up in the clustering trend. McClatchy, still absorbing its 1998 acquisition of the Star Tribune in Minneapolis, sat out last year’s buying spree. With holdings in six states, McClatchy “has benefited from operating in different regions of the country,” Pruitt says.

In 1986, 90 percent of revenue came from California; today, only a third does. “We feel good about that,” asserts Pruitt. “We like having geographic diversity as far as our revenue stream is concerned.”

The size of a property is a major consideration for Paxton when it goes shopping, and a factor of increasing importance for CNHI. Paxton’s flagship publication, The Paducah Sun, has a circulation of 28,303. Since Paxton began an expansion program 11 years ago, most of the papers it has acquired have ranged in circulation from 10,000 to 30,000 households. Having developed expertise in managing midrange newspapers, Paxton managers consider them their niche market.

One advantage of sticking to this particular slice of the market, observes David Paxton, is that opportunities to buy papers of this size arise more often than for larger ones, and competition proves less stiff. In November, Paxton announced the purchase of the 31,422-circulation Messenger-Inquirer daily in Owensboro, Ky., from Belo of Dallas.

CNHI, meanwhile, is rethinking its focus on small newspapers. Eighteen months ago, notes Reed, the average circulation for a CNHI daily newspaper was 6,000. “We have made a decision to acquire larger daily newspapers,” Reed says. The company currently targets dailies with circulations between 10,000 and 50,000. Like Paxton, CNHI sees more opportunity—and more profit—in this range. Below 10,000 circulation, Reed says, “the margins are not as healthy and the growth potential is less.”

The acquisition strategy at the privately held Evening Post Publishing Co. in Charleston, S.C., aims for geographic and industry diversity, reports Ivan V. Anderson Jr., president and CEO. As at McClatchy, Evening Post executives want to smooth the revenue impact of regional economic slowdowns by spreading investments across the country. In addition, management intends to diversify the portfolio to achieve a rough balance between newspaper and broadcast properties.

In November, Evening Post Publishing Co. announced its plans to acquire the Bryan-College Station Eagle (morning, 23,586) in Texas from Belo. The Eagle met its size requirements, says Anderson, and Bryan-College Station, home of Texas A & M University, the country’s fourth-largest school, provides an economically solid market.

Employee-owned Omaha World-Herald Co. takes a practical, numbers-oriented approach to buying newspapers. The first thing John Gottschalk, chairman, CEO and publisher of the Omaha World-Herald, wants to know about a proposed deal is the economic health of the acquisition’s market: the strength of retail sales, the stability of the employment base, and growth potential.

Within that framework, most World-Herald properties, except those in California, sit on what Gottschalk describes as “a 700-mile Main Street that runs from Scottsbluff, Neb., to Ames, Iowa.” Recently, World-Herald acquired an interest in The Daily Nonpareil (evening, 16,807) in Council Bluffs, Iowa, just over the border from Omaha, with a group of local partners. In addition, the World-Herald acquired the Southwest Iowa Newspaper Group, including Shenandoah Valley News Today (evening, 3,500) from MediaNews Group Inc. of Denver, fleshing out its Iowa presence. World-Herald traded the Current-Argus in Carlsbad, N.M. (morning, 8,435), to MediaNews because it operates far from Gottschalk’s “Main Street.”

Virtually all of these transactions were cash deals, from funds on hand or easily borrowed. “From a seller’s point of view,” says Murray of Dirks, Van Essen & Murray, “I can’t remember the last deal that wasn’t all cash.”

However, Freedom’s Segal finds the idea of swapping properties very appealing. “It makes perfect sense,” he reasons. “If you swap, you don’t have to deal with capital gains.”

Click to enlarge.

In 1999, Freedom swapped its Crawfordsville, Ind., paper with a PTS Inc. biweekly in Weslaco, Texas. Last year, it traded its Fort Pierce, Fla., paper for a Destin, Fla., paper owned by The E.W. Scripps Co. and cash. Segal sees a good market for swaps because most newspaper companies do not need cash; their goal is to improve their property portfolios.

But how good must a portfolio get? How large a market presence is big enough? Kirk A. Davis, president and CEO of Community Newspaper Co. in Needham, Mass., says, “Growing can give a newspaper company a stronger economic underpinning, better cash flow, new technology or access to Internet portals.”

Davis and most other executives insist that swelling up is not the main object of the merger-and-acquisition game. They warn that careless growth can derail a company. Davis terms growth “perilous” when it comes at the expense of quality or when it dilutes the organization’s business focus.

“Too big may be when the returns from adding properties to your newspaper portfolio fail to increase the value of the company,” volunteers Timothy E. Stautberg, vice president of communications and investor relations for Scripps in Cincinnati.

No one imagines that the pace of mergers and acquisitions set last year will continue this year. But Lavalla expects the market for acquisitions to remain vigorous.

“The reason we’re buying papers,” reminds Paxton, “is because the newspaper business is a very good business.”

Copyright 2000, Newspaper Association of America. All rights reserved.

This article may be transmitted or redistributed provided that the article and this notice remain intact. This article may not under any circumstances be resold, transmitted or redistributed for compensation of any kind without prior written permission from the Newpsaper Association of America.

If you have any questions about these terms, or would like information about licensing materials from Presstime, please contact us via e-mail (NAApubs@aol.com).

Presstime is the registered trademark of the Newspaper Association of America.