Legendary Compounder: Thompson Newspapers
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Legendary Compounder: Thompson Newspapers
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Welcome to Atlasview Insights! We are thrilled to have you join us for another edition packed with valuable content for small business owners, deal makers, and investors alike.
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In this newsletter, we cover:
A Breakdown of Thompson Newspapers
Atlasview’s Investment Criteria Breakdown
Our Favorite Reads
Insights From Our Team
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Industry: Software and tech-enabled businesses
Business Profile: Sticky B2B customer base
Size: Minimum $1m EBITDA or $5m ARR
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Legendary Compounder: Thompson Newspapers
Our team recently came across this substack article on Thompson Newspapers and it has to be one of the best articles/case studies we've read this year. So we wanted to share the key learnings with our subscribers.
Thomson Newspapers was a rollup of small/niche local newspaper businesses. Roy Thomson stumbled upon the opportunity in his 40s, after several failed businesses.
Roy discovered that these local newspapers were mini-monopolies, they had strong pricing power and low capex requirements - delivering incredible cash flow relative to invested capital. The TAM for each local newspaper was very limited, and there wasn't much interest (at first) in these businesses because they were so small, so Roy could acquire them cheaply. The idea was, he was going to continually reinvest the cash flow to acquire/aggregate many of them, and keep them all decentralized.
If this strategy sounds familiar, it's because it's near identical to Constellation Software. In fact, Mark Leonard has said that Roy Thomson was his inspiration and business hero.
Thomson Newspapers acquired around 170 newspaper businesses and became known as one of the greatest compounders of its time. They compounded earnings at 20% for 38 years (this is truly mind-blowing). It catapulted the Thomson family to become the wealthiest family in Canada (a title they still hold today).
However, competition to acquire these newspapers rose sharply, and as a result, they became more expensive to acquire. This inevitably put downward pressure on ROIC. In the end, the entire business was disrupted by Cable TV. Take a look at how ROIC tracked over time below, in comparison with other serial acquirers:
The author did an incredible job researching and putting together such an insightful article. The key takeaways section he included at the bottom of the article really nailed it. Let’s rehash some of them here:
Everything is cyclical, it's just some cycles are longer than others. But all business models have an expiry date. Be careful of extrapolating historically positive metrics far into the future.
"Growth" via price increases alone can be misleading for investors. It can mask a deteriorating industry, and make the product/service offering unattractive to customers compared to alternatives.
Everything is supply and demand. Attractive acquisition opportunities will spawn copycats (demand goes up, capital flows in). This will inevitably push purchase price up and ROIC down, reverting an attractive opportunity back to an average opportunity. Pay attention to capital flows!
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Atlasview Equity is a private equity firm specializing in software and tech-enabled businesses. We combine patient capital with proven operational strategies to deliver predictable results for our stakeholders.