What is the value of Creative Loafing? An in-depth analysis


August 10, 2009

On August 25, the Chicago Reader‘s parent company, Creative Loafing, Inc., will be sold to a new owner through a federal bankruptcy auction in Tampa to repay $43 million in debt.  As two groups prepare to bid in the auction, let’s try to figure out how much Creative Loafing – and by extension the Chicago Reader – is really worth.

First, some background on the bidders.

Since Eason and Creative Loafing, Inc., who are based in Tampa, purchased the Chicago Reader (along with Reader-owned Washington City Paper) in July 2007 – for an unpublished and unreported sum – the alternative newspaper business has taken a hard turn for the worse. In just two years newspaper readership has declined sharply and advertisers have found other channels to market their products. And that big boogey man, Craigslist, has continued to drive a stake into the heart of alternative newspapers.


Eason has assembled a team to bid in the
bankruptcy auction, that includes his family and BIA Digital Partners (who
financed $10.5 million of the Reader-City Paper purchase). As an equity owner,
rather than a creditor, if Eason loses the bid, he’ll likely lose everything
he ever invested in the company.

The other bidder is Atalaya Capital Management, who financed
Creative Loafing, Inc.’s purchase of the Chicago Reader in July 2007, and to whom
Creative Loafing, Inc. now owes $31 million. Even if Atalaya loses their bid to
Eason, they will likely recoup something from the sale proceeds, since they are
Creative Loafing, Inc.’s top creditor.

It seems as if the August 25 auction will be a foregone
conclusion, as Atalaya has access to much more cash than Eason and his team –
and so long as they bid under $31 million, they stand to recoup some of their
losses. For his part, Eason is hoping the judge will accept his assuredly lower
cash bid, and call it “the highest and best bid” since he has newspaper
management experience, and Atalaya does not.  Of course, how good is a manager that drives his whole
enterprise into bankruptcy in two short years?

So, what do we know about the value of Creative Loafing,
Inc.?

There’s lots of ways to determine the value of a company,
and depending on the health of the company, the willingness of banks to lend to
potential buyers of a company, and the general health of the economy, different
valuation methods can be used. Here we’ll talk about two methods, book value and revenue
multipliers, then compare them.

Book Value

Most private companies do not disclose their financials, but
since Creative Loafing, Inc. is in bankruptcy court and submitting themselves
to the mercy of its many creditors, they are required by law to drag out their
dirty laundry. 

Here’s Creative Loafing, Inc.’s assets as listed in their
bankruptcy filing
:

CL_assets.jpg

There’s a noticeable difference of about $30 million between the Estimated Book Value
(EBV) of the paper and the Estimated Liquidation Value (ELV). The ELV is the
worst case scenario, where the business is completely shut down and everything
is sold off.  You’ll notice that a
majority of the EBV is found in two strange categories, “Identifiable
Intangible Assets, net” and “Goodwill and other indefinite lived intangible
assets”.

The first of the two is the supposed value of things like
website domain name and company brand name value. This is definitely worth
something, but it is more valuable to an on-going company that uses them
everyday than to someone else.  For
instance, remember Napster? They were huge. Now someone else uses that
trademark name. Didn’t know that? That’s exactly why the brand name loses value
after the going-concern shuts down.

The second is accounting speak for, “this is how much all of
our blood sweat and tears poured into this company are worth.” But, since this
is the real world, the ELV thinks goodwill is worth nothing on the open market.

So ultimately, this document shows that the Book Value of
the company is worth somewhere between $3.6 million if everything was shut
down, and $23 million (forget the goodwill) if it keeps its doors open.

Revenue Multiplier

When negotiating a price for the sale of a strong (i.e. not
bankrupt) company, buyers and sellers begin by discussing a revenue
multiplier.  When I was looking at
purchasing alternative newspapers in 2002, the rule-of-thumb multiplier was 9x
Earnings Before Income Taxes, Debt and Appreciation or EBITDA.  Basically, how much cash the company
was generating before it had to pay the government or their banks.

We don’t have access to an actual cash flow statement from
Creative Loafing, Inc., but from the bankruptcy filings we have their 2009
estimate
– which we’ll imagine is somewhat accurate.

CL_cash.jpg

Taking that number, let’s pretend Creative Loafing, Inc. has
no liabilities and plug in the other numbers we got above into our handy
valuation formula
:

formula.jpg

Considering Creative Loafing has hundreds of employees and
six newspapers – including in Atlanta, Chicago and Washington, D.C., that $20
million value seems pretty low.

Now consider this: According to some newspaper brokers, the
average newspaper has been sold at 5-8 times EBDITA. Atalaya’s court filings
claim Creative Loafing, Inc. should be valued at 4x – giving it a value of
about $11.4 million.

For argument’s sake, let’s split the difference between 9x
and 4x, and say 6x. That would be $14.9 million.

Let’s throw one more curve – back in February, a Knoxville
investor, Brian Conley, offered $13.3 million for all of Creative Loafing, Inc.

So, here’s the range of possible valuations of Creative Loafing,
Inc.:

$23 million – Estimate Book Value (minus goodwill)
$14.9 million – 6x Revenue Multiplier
$13.3 million – Conley offer
$3.6 million – Liquidation Book Value

Declining Revenue

Assuming bankruptcy wipes all the debt off the books, these
seem like fire sale prices, right? Except for one thing: In 2008, Creative
Loafing, Inc.’s EBITDA was $3.538 million – that’s almost twice of the 2009
revenues. The bankruptcy filings do not explain why this is the case, some of
it may be the result of buyouts (over 50 employees have been let go this year)
but by the looks of the ever-shrinking Chicago Reader, we should assume most of
it is because of declining ad revenues.

So, whoever ends up with Creative Loafing, Inc. will have to
have some significant cash on hand to build the company – and cushion them from
expected losses. Regardless of who picks up Creative Loafing, Inc. and the
Chicago Reader, the survival of these papers will depend on skillful
management, a thoughtful new business model for the future and deep pockets.

UPDATE

A reader – who happens to be a banker – emailed me with a comment about “goodwill”:

I disagree with your statement that “The second is accounting speak for, “this is how much all of our blood sweat and tears poured into this company are worth.” But, since this is the real world, the ELV thinks goodwill is worth nothing on the open market.”

…actually goodwill is the amount they paid over a company’s book value when they made acquisitions.  So if the Reader has equity of $1 million and you pay $2 million for them, that goes on the books with $1 million in goodwill which you amortize over many years.  That’s why it’s worth nothing, because it’s a phantom number that comes out of accrual accounting because the assumption is that if you paid $2 million, what you bought is worth $2 million instead of the $1 million in equity value that is on the books.

http://en.wikipedia.org/wiki/Goodwill_(accounting)

He’s right of course. Goodwill is the main way to keep track of the equity value of a company, based on a previous purchase price or how much equity has been put into a company. I should be less cheeky with accounting.