Japanese media group Nikkei is taking a bold step with its purchase of the Financial Times. But the financial logic behind the $1.3 billion deal to buy the FT from Pearson, its current owner, is sketchy. Sure, Nikkei gets a bucketload of kudos. But it has shelled out 35 times adjusted operating income, about three times as much as the paper is really worth – if cold economics were the only consideration.
Quoted European media peers trade on equivalent multiples of between 10 and 15. The average is 12. True, you’d expect a buyer to pay some sort of premium for control. But the FT is being bought on a multiple around twice the size Amazon’s Jeff Bezos paid the Graham family to secure the Washington Post in 2013.
The FT’s super-premium price is all the more astonishing because the financial outlook is so insecure. Once over that largely digital threshold, the Financial Times may find itself on a clear path to steadily improved revenue. To date, though, across the sector, readers and advertisers are leaving in masses and digital efforts haven’t paid nearly the same dividends as ink and paper.
The FT has made some strides. It was one of the first newspapers to embrace digital subscriptions, which now represent 70 percent of its audience of 720,000. We now also know that revenue from the FT Group is about $518 million in 2014 with operating income $37 million in 2014. What was left unsaid is how much the FT has grown its revenue or operating income, if it all. Pearson didn’t provide those details.
For Pearson, the sale means the company can now fully focus on the education market leaving Nikkei to ponder the problems besetting news organizations.
For its part, Nikkei is getting a highly respected global brand and the chance to reach English-speaking readers. The FT might provide Nikkei with routes to new markets, and new chances to explore markets within which it already operates. At such a lofty price however, Nikkei will have to work extraordinarily hard to make the numbers stack. It might also try to claw back some of the money through cost cuts. But that, in the long term, might denude the FT of the kudos Nikkei has paid so much money for.
(This item has been updated to add the adjusted operating income multiple in paragraph one.)