McClatchy Expands Its “Keep The Best And Leave The Rest” Doctrine To Dumping Its Largest Newspaper At A Huge Loss, Something For The New York Times Company To Ponder With The Boston Globe?

The only possible answer is that big loss or not, the company decided better to have whatever money it could get from that newspaper sale now to invest in digital expansion and pay down debt, than be lumbered by a large metropolitan newspaper whose best circulation and advertising days are over, and where additional cost-cutting to maintain existing margins is going to be difficult to achieve given the highly unionized labor force.

In other words, why mess around with a property that has seen its best days? No nostalgia here, just a serious business decision that whatever money it can get from the property can be better utilized elsewhere. Not a positive message for metropolitan newspapers that are particularly suffering large monthly circulation and adverting declines.

And the McClatchy executives have already shown the newspaper world they are not stupid – they pulled off the Knight-Ridder deal last summer, dumped the 12 newspapers they didn’t want from that sale, not only getting good prices but showing how smart they were in doing that (think San Jose, think Philadelphia), and given the general newspaper climate they came out of all of that smelling somewhat like a rose – although it must be said their share price has sunk 20% since March 13, the day it announced it was buying Knight-Ridder.

So McClatchy has made the hard-nosed business decision it doesn’t matter that it paid $1.2 billion back in 1998, the important question its management and board had to answer now was how the money invested in Minneapolis could be used best today and its decision was by no longer supporting that newspaper. There surely is a lesson there for other newspaper groups (think Tribune).

When McClatchy bought the Star-Tribune In 1998 it then paid 16 times cash flow at a time the cash was really flowing. It sold out at 7.4 times cash flow at a time the flow had become more like a trickle, and that percentage was less than McClatchy paid for the Knight-Ridder papers just four months previously. The company will also see a $160 million tax benefit and with that the multiple becomes 9.6% and that is close to most newspaper deals in the past 12 months.

ftm background

In Just Two Months, McClatchy’s Dumping Of 12 Poorly Performing Knight Ridder Newspapers Is Showing Itself To Have Been Very Smart. Four of Those Newspapers Are Already In Serious Trouble
McClatchy was the only newspaper group willing to buy the 32 Knight Ridder newspapers in one deal and didn’t really have to pay a premium. What McClatchy didn’t tell Knight-Ridder executives or their bankers, however, was that they were going to onward sell 12 of those newspapers considered to be in poor performing markets.

McClatchy Taught The Big Newspaper Chains A Powerful Lesson: Keep The Best and Leave The Rest. And That Wall Street Likes!
US newspapers chains are trying to sell their worst financially producing newspapers and for once they are getting high marks from Wall Street.

Gary Pruitt Says It Would Have Been Inconceivable A Few Years Ago To Have Bought Knight-Ridder For Such A Low Price. Wall Street Says McClatchy Would Have Done Better Buying Its Own Shares and Calls The Newspaper Industry “A Stinker”
Gary Pruitt is fond of telling people that he made a great financial deal in buying Knight-Ridder’s 32 newspapers for “only” $6.3 billion including debt assumption – such a low price would not have been possible just a few years ago when newspapers were in favor with Wall Street. But Wall Street has its final say – the money would have been better spent on McClatchy buying its own shares.

A High Price For Knight-Ridder Sale Would Have Signaled A Bright Future For Newspaper Valuations, But McClatchy Paid Practically No Premium And Yet In The Intervening Weeks Its Shares Have Dropped 12% To A Four-Year Low. What Does That Tell You?
Most observers seemed to think that McClatchy did OK. It bought Knight-Ridder for $4.5 billion representing a dollar or two a share over its stock market price, and then said it was only keeping the 20 newspapers that showed real growth and it was dumping the rest, and that sale, after tax, would reduce the total transaction to around $3 billion.

Lee Bought Pulitzer Last Year for 13.5 times Earnings Yet McClatchy Paid Just 9.5 times Earnings For Knight-Ridder. What Does That Tell You About the Value of Newspapers Today?
That someone, it happened to be McClatchy, paid about $67.25 a share for Knight-Ridder -- some $4.5 billion plus absorbing K-R’s $2 billion of debt -- was about what the markets expected. But where was Gannett and all those private equity companies that were expected to put in bids? The word is they dropped out, which gives as good an indication as any that newspaper valuations are not what they used to be.

There are many who will argue that McClatchy should have sold for no less than the combined sale price and tax benefit total of $690 million and it would still have had a tidy tax benefit to add on. But the company showed when it sold those 12 Knight-Ridder newspapers that it can get top dollar, so for the sake of argument that means management figured in Minneapolis it got as good as it could get in current circumstances for a quick sale.

The bad message for the rest of the newspaper industry, therefore, is that valuations are now really down. The days of sales at 10 – 12 times earnings are gone, last year’s average was about 8.7% and this year its going to be more like 7-8%.

The positive spin being put on the sale in Minneapolis is that the sale doesn’t show a negative judgment on the newspaper, but rather this is just McClatchy restructuring its balance sheet. That’s not really so. The truth is that McClatchy has seen with each passing year the cash flow dip in Minneapolis – it has gotten around $1 billion in cash flow in the eight years it owned the property – and in order to hold to that profit it would have to make some pretty drastic cuts. No doubt with Minneapolis as heavily unionized as it is the McClatchy folk watched what went on in Philadelphia the past three months and decided they wanted no part of anything like that.

Gary Pruitt, McClatchy CEO, really summed it up pretty clearly. “The Star Tribune did very well for a few years, but recently it has lagged in performance. Large Metro papers have underperformed smaller ones because they’ve been more dependent on classified ads, which have already been most affected by the Internet. The Star Tribune suffered from that.”

Now take that same paragraph and substitute “The Boston Globe” for “The Star Tribune” and you have another case almost exactly the same. The New York Times Company bought the Globe in 1993 for $1.1 billion. Today its monthly circulation and advertising declines are horrendous and the newspaper has recently been valued at around $550 - $600 million. Former GE CEO Jack Welch is leading a group of investors wanting to buy the newspaper but The Times has so far said “no” to any negotiations, saying the Globe remains an important Times Company asset.

What the Times Company has done, however, is to sell its broadcast group of nine TV stations to a private equity firm for $575 million, which most analysts have said is not a great price, but ok.

Janet Robinson, president and ceo of The Times Company, sang from Pruitt’s hymnal saying she wanted to concentrate on the company’s rapidly expanding digital business -- it is looking for 30% growth this year -- as well as development of its newspapers.

Shareholders, however, have indicated they will be happier if the company uses the money to pay down debt, something that Standard & Poors Rating services brought to the forefront as the past year ended by downgrading the Times’ long-term corporate and unsecured debt to BBB from A- The company has about $1.5 billion in debt, and S&P says that while the broadcast division sale will help with debt reduction the company’s financial profile for the next two years is expected to remain weak.

If Robinson really wants to expand digital operations where the real new income is coming from, really reduce debt, and get a major debacle that is taking much of management’s time off the table she could do a lot worse than revisit the decision not to sell The Boston Globe.

The Times’ management needs to adopt the McClatchy doctrine -- don’t worry about what was paid years ago when circumstances were different but rather accept conditions as they are today, get the best possible, use the tax write-off and get out of a bad situation as quickly as possible, investing that money where it will do more good and allow management time to be better used.

The only real question is how long it will take the Times’ management to bite that business bullet.

New York Times CEO Reiterates Boston Globe Not For Sale - January 21, 2007

Janet Robinson, New York Times Company CEO, has told a meeting of Boston business and political leaders that even though these are tough times for the Boston Globe the Times’ Company has no intention of selling the newspaper.

“The Boston Globe is an extremely important asset to the New York Times Company and we feel it is on a very very good course,” she said. What she didn’t say is that the newspaper today is worth about half of the $1.2 billion The Times Company paid for it in 1993.

Already within the New Year the axe has fallen at The Globe and its sister Worcester Telegram & Gazette with voluntary buyouts offered for around 125 jobs, including 17 editorial jobs at The Globe. The company is looking to outsource around 55 jobs, primarily in finance, to India.

Nineteen Editorial Staff At Boston Globe To Go - January 12, 2007

As yet another sign that things are not getting any better at the Boston Globe, its parent New York Times Company has announced that 19 editorial staff are to lose their jobs as part of a larger exercise in which 125 positions in total are to go in its New England Media Group. The Globe currently has 412 newsroom employees

Buyouts will be offered to staff with more than 10 years experience at the Globe and at the Worcester Telegram and Gazette, both of which are New England Media newspapers. In all the company wants to see 70 newsroom positions go in the group with another 55 in finance and advertising with those jobs then turned over to outsourcing.

Globe editor Martin Baron said, “These reductions come at a time when we must fully transform our newsroom into a multimedia news and information organization. That in itself makes demands on our time and resources. Our jobs will be different. But it is a challenge we must meet if we are to thrive in the future.”

The State of the Print Media in the World