Luxury Advertising Boosts The FT’s Performance, So The WSJE’s Style Journal Luxury Quarterly Magazine Launching This Week May Be Great Timing, But Lest You Think Newspapers Are Back in Vogue, Goldman Sachs Still Calls Them Value Traps

The Financial Times reported a strong 1st quarter with advertising up 13%, most of it from luxury advertising. Considering that about 80% of its advertising gains are profit those numbers bring more smiles to the top executives of the FT’s parent company, Pearson.

Pearson derives about 70% of its revenues come from its US-based educational publishing business and the company is looking to expand that business in China and India. The question therefore being asked ever since the FT ran into financial difficulties in 2003 is whether the newspaper really fits any more into Pearson’s business mix.

Pearson has a new American chairman, Glen Moreno who, when asked about the FT at last week’s annual general meeting said, “I admire the newspaper. The immediate task is to restore it to serious profitability.”

That’s not the same as what former chairman Dennis Stevenson said last year, “Rumors of us selling the FT are completely untrue. We have no intention to do so.”

Even Marjorie Scardino, Pearson’s American chief executive, refused to go out on the same limb she did some years ago when she said the FT would be sold “over my dead body.” When she was asked to make the same statement at last week’s meeting she angrily told journalists that it was “pathetic” that she would be asked to repeat the statement, and she refused.

Financial analysts earlier this year said the FT could be worth around £850 million. If the paper was to do what Moreno wants it to do – “return to serious profitability “ – then that value will go up. The FT made about £2 million profit in 2005 after two disastrous years beforehand – 2004 saw a loss of £9 million in 2004 and £32 million in 2003.

Last year it fired its editor, Andrew Gowers, and named Lionel Barber, who had been its US editor, as the man in charge. Since his appointment barely a week has gone by when there haven‘t been announcements of shifts in senior editing positions. It may be doing some good since circulation is up 4% this year.

The FT has long made good money from its weekly glossy magazine supplement How To Spend It that draws in the luxury advertising, whether it be Hermes or BMW. The Wall Street Journal Europe hopes to cash in on the expanded luxury sector spending by launching on Friday, and thereafter quarterly, a 64-page glossy also aimed at attracting those who have the money on where they should spend it, too.

ftm background

Knight-Ridder Hired Goldman Sachs to Garner Shareholder Value Via a Sale, So At Least That Wall Street Firm Has a Positive Outlook for the Newspaper Industry? Well, Actually, No, It Believes Revenue Growth Looks “Challenging” -- What a Great Sales Pitch!
Everyone was expecting US newspaper circulation numbers for the past six months to be bad. But very few expected them to be THAT bad. At the San Francisco Chronicle, for instance, nearly one in five subscribers quit. Overall, the country lost 1.2 million subscribers, 2.6% of its base.

US Newspaper Executives Tell Wall Street This Week Their 2006 Prognosis But the Real Story is That Knight-Ridder Won’t Be Presenting – It’s In the Midst Of Being Forced to Try and Sell Itself -- And That’s the Real Future That Many of Them Don’t Want to Talk About!
When the major US publishing companies give their various reports to the 33rd annual UBS Media Week Conference and to the Credit Suisse First Boston media meeting this week the shadow of who is not there will be overwhelming. Knight-Ridder’s prognosis is already known – its three main shareholders want it sold to gain shareholder value, and many of those other newspaper companies – especially those without family protection on their shareholdings – fear they could soon be in the same boat.

“Private Capital Management (PCM) Has $4 Billion Invested in US Newspapers. What Do They Know That We Don’t”? – FTM Sept, 2005; PCM Tells Knight-Ridder To Put Itself Up For Sale
In what must be considered a very gloomy assessment of the US newspaper business, one of its largest institutional investors has seemingly lost patience with the industry being able to turn itself around, and has now urged Knight-Ridder (K-R), the country’s second largest newspaper chain, to put itself up for sale.

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

It’s Looking Like Gannett Would Prefer Buying British, But It Could Still Get Involved in The Knight-Ridder Sale
There are two major newspaper group sales on offer internationally – the Northcliffe regional newspapers in the UK, and Knight-Ridder in the US, and both make a lot of sense for Gannett, the largest US publisher. But some $2.1 billion for the UK group and perhaps $4 billion plus for the US group could cause some financial indigestion, and not everything in the US purchase fits Gannett’s needs. Indications are it is leaning towards the British buy but it might team up with another group in the US for Knight-Ridder (K-R).

The launch issue includes stories about Louis Vuitton’s involvement in reviving the America’s Cup sailing competition, the latest trends in watches, and a review of high-end boutique hotels in Europe. Perhaps in a bid for the female reader the cover story is on actor Ralph Fiennes.

The WSJE turned tabloid last September and according to management its advertisers have taken to the new format (but no word from management on what they did with the rate card to accommodate the majority of advertisers who believe a tabloid full page ad is not worth the same as a tabloid full-page ad).

The company also claims that readers have taken to the format although Dow Jones chief executive Richard Zannino admitted recently there have been enough negative comments from readers who believe there are not as many stories as before that the paper will have to retool to change the perception. Company officials say that means tweaking, but if there is a perception of less stories that it going to take more than just tweaking.

Just as the FT named a new editor who has instituted many editorial changes, the WSJE will be in a similar position come June to do the same when current editor Raju Narisetti leaves to head editorial operations at a start-up business newspaper in India. Narisetti took over from Fred Kempe last summer after Kempe transferred back to New York to concentrate on the convergence of the print and web products as part of a major corporate reshuffle to save international costs. That means the WSJE will be on its third editor in less than 12 months.

Dow Jones, parent of the WSJE, had a decent 1st quarter but not as well as analysts expected. The success comes from the 14.9% increased lineage at the US Wall Street Journal with ad sales rising 18%.

But with newsprint costs up around 6% this year, for instance, keeping a lid on expenses is difficult. Zannino has continued the cost-cutting instigated last year, making some 20 executive cuts in a structural overhaul that is expected to save the company an additional $14.5 million this year. Management says the new Saturday edition is doing well, but is still experiencing heavy (expected) losses and while the second half will see those Saturday losses drop they won’t be entirely gone. Meanwhile Moody’s Investment Services lowered the company’s debt rating.

So the obvious question being asked more and more is whether the worst is over for newspaper share prices that currently are around four-year lows? With the FT and the WSJ showing signs of improvements perhaps this is the time to start investing again in newspaper companies?

Not according to Goldman Sachs – it believes newspapers have another 16% to give up before they become fair market value.

“In our view, valuation have not yet reached the level where investors are ‘paid to wait’ for a cyclical bounce in industry growth. With the ever-increasing fragmentation in the local media marketplace, we believe we are experiencing a permanent downturn shift in valuation levels.”

Good thing there are Chinese Walls at Goldman Sachs. Another division of the company was a principal adviser to Knight-Ridder in its recent sale to McClatchy and it was charged with making as favorable a case as possible in the market for buying newspapers.

It has not gone unnoticed since that sale was announced (it should be completed by July 1) that McClatchy stock has fallen some 12%, and that Moody’s now has now downgraded McClatchy and Knight-Ridder debt as Ba1 – junk.

Also investors should be concerned that only McClatchy of all US newspaper groups made a bid for all of Knight-Ridder. Not a very convincing view of the newspaper business by the newspaper business!

And Moody’s makes no bones that a company getting very heavily involved in just newspapers is getting heavily involved in risk-taking. “Moody’s believes that McClatchy’s concentration in a single industry (substantially all revenues are derived from newspaper-related operations) creates vulnerability to the increasing level of competitive market share and pricing risk facing newspapers.”

So, what would bring investors back to newspapers? Revenue growth and improved earnings. Goldman Sachs’ prediction: “Unfortunately, neither of these events seems likely on a near-term basis.”

Luxury Advertising Boosts The FT’s Performance, So The WSJE’s Style Journal Luxury Quarterly Magazine Launching This Week May Be Great Timing, But Lest You Think Newspapers Are Back in Vogue, Goldman Sachs Still Calls Them Value Traps

Business newspapers are counting on increased advertising for luxury goods to pull them out of their revenue doldrums of the past four years and the indications are they may just be right.

Are newspapers really in the pink (doing well) ?