Commentary

Media Silver Lining: Robust Local Sites Valuations

Broadcast and newspapers with enterprising local Web sites are sitting on beachfront property. It will be their ticket out of the economic recession and the decline in their traditional core business. Many of these sites with double-digit revenue growth are being valued at between $30 million and $450 million.

Still, it is unclear whether senior management and owners are bold enough to continue investing stand-alone resources to aggressively develop these new growth centers--especially in troubled times. That is the gripping question raised by a report released today by Borrell Associates and the BIA Financial Network that values local Web properties.

Nondisclosure agreements with the local media surveyed--about some 3,200 Web sites--prevents specific private financial details. The joint analysis documents the surprisingly healthy and rising collective values of these local sites. Overall, it points to the generally underestimated importance and premium value of local content, advertising and connections in the digital marketplace.

"For the first time, these Internet operations are being viewed separately, rather than as extensions of traditional TV, newspaper and radio. As valuable assets in their own right, they represent an opportunity that can be seized," Borrell said in an interview.

Newspaper-owned Web sites--typically the most developed--and owned major market newspapers, such as the Los Angeles Times, Chicago Tribune, The Miami Herald and The Philadelphia Inquirer, generally are worth between $300 million and $450 million. Some enterprising, independently owned local sites can also have valuations as high as boston.com and signonsandiego.com. Local domain upstarts such as LosAngeles.com, Atlanta.com and Toledo.com have the potential to eventually be flipped to media players.

Local television Web sites positioned for rapid growth, from streaming video and transactional advertising, can be worth as much as $40 million today. Stand-alone local radio sites can be worth as much as $20 million.

Importantly, these valuations can be used to raise third-party funding from angel investors or venture capital groups to pay for continued site development. The valuations also can be used to make the case for increased investments by family-owned media companies, whose overall values can be bolstered by Web properties.

The biggest threat to local Web growth comes from within. Borrell is advising management to commit and protect investment in separate sales and editorial staff that can develop rich media and digital video products as new revenue sources. Many newspapers and television station groups are cutting these costs during financially strained times and even folding their Web properties back into legacy media operations, which have a starkly different orientation and economics.

Such shortsighted decisions threaten rapid revenue growth of many local Web sites that have "far greater multiples of revenue or profits than their parent properties," Borrell said.

The report conservatively estimates that some more successful local sites generally trade between six and eight-times revenues, although some experts insist that multiples can be 10 to 15-times revenues. This compares with legacy media multiples averaging two to six-times revenues.

As dire events of late remind us, valuations are everything--but remain volatile and uncertain in all sectors. Indeed, one of the causes contributing to AIG's continuing woes is the company's inability to use its diverse assets as collateral for a bridge loan to avoid bankruptcy just because potential lenders cannot agree on their value. By contrast, and for the first time in years, many media companies are generating quantifiable new revenues and asset values from the Web.

High-demand ad categories--such as email, streaming video and paid search--are fueling local broadcast Web site growth, while newspaper sites generally are tied to lower-growing banners and listings that constrain their value. All local Web plays are attracting local and regional advertisers that are new to online or interested in establishing regular interactive ties to--and transactions with--target consumers.

Pure-play local Web sites that are not associated with traditional media (such as Google, AOL, MSN, Yahoo and Monster) represent about 53% of all local online ad dollars; newspapers account for 27% and broadcast TV accounts for 7.5%. In an analysis of 2007 median financials, newspaper Web sites generated $715,000 in revenues on $450,000 in investment for a 37% cash flow of $265,000. Local television sites generated $450,000 in revenues on $350,000 in investment for 22% cash flow of $100,000.

The report's median Web site valuations are telling: Newspaper sites have a collective median value of $3.5 billion on a 4.6 times revenue multiple and a 12.5 times cash-flow multiple. Local TV sites have an estimated median valuation of $3.1 billion on a 4.9 times revenue multiple and a 15.8 times cash-flow multiple. Clearly, there is much more in the future than meets the eye today.

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