Morgan Stanley Calls Time On The 'Times' Dumping Its 7.3% Holding In The New York Times Company As Elsewhere Newspaper Boardrooms Paint Doom And Gloom Scenarios In Untangling Less Profitable Newspapers From Their Better Earning Businesses

This raises all sorts of issues for the New York Times Company, not the least of which is Morgan Stanley’s very public message that it did not have confidence in the Times’ management. Financial analysts believe other institutional investors may now try and bail out and all eyes will be on T. Rowe Price, the Times’ largest institutional owner with some 14% of the shares. Also, the big question is, “Who bought?”

The question has been asked in past months whether the Ochs-Sulzberger families might not attempt to take the company private. With the share price in the low 20s they said no, but with Wednesday’s close at around $18.40 (it was still going down in after hours trading as this is written) the shares may be reaching levels where a buyout might be on, depending on whether the current credit crunch would allow?

Morgan Stanley’s Investment Management, based in London, has tried for some two years to get the Ochs-Sulzberger families to give up the dual class share system which in effect allows the family to appoint nine of the company’s 13 directors. Shareholders owning 42% of the shares supported the Morgan Stanley stance in an April meeting, but apart from withholding their votes for directors there was nothing they could do to force the company to loosen its reigns. The Times has not been immune from the perils the newspaper industry has faced in the past five years, and the company’s shares have lost more than half their value during that time.

Given the benefit of hindsight one might wonder if there could have been another outcome to this scenario if the Times’ management and its financial advisers had thought about the process announced separately this month by Belo and E.W. Scripps to enhance shareholder value by dividing their companies into two – one company holding the businesses doing well, and the other company housing the businesses not doing so well. Basically extend dual shares to dual companies.

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Might that have been a better solution than the Times selling its broadcast division earlier this year for $575 million? It could have created a separate company for the broadcast division – but since that would only be about 5% of the existing company’s revenue, the new company would also have needed enhancements with non-newspaper digital businesses such as About.com and even the new health web site, perhaps its New York classical radio station, WXQR – just about all of its holdings that are not absolutely newspaper related. The spun-off company could have had one class of shares which would have pleased the institutional holders while the existing company, holding the newspaper group, would continue as it is, thus allowing present management to completely control and protect the New York Times newspaper which they give as the main reason for maintaining the two-class share system.

With the company’s shares hitting a 10-year low Wednesday it would seem trying to enhance shareholder value by selling the broadcast division didn’t do the trick.

Belo’s idea was so simple in enhancing shareholder value that the question must be asked why it took a media company so long to figure that one out? The idea was simple, and apparently tax effective -- since Belo’s newspapers were dragging down the share price of the multimedia company why not take a page from Freud’s book and set the scene for the survival, nay, the well being of the fittest? Keep the existing company for only that part of the business doing really well and create a new company to segregate the business not doing so well. Give the weaker company a fighting chance by stripping away all its debt, loading that onto the stronger company that has better chances of earning the cash flow to pay it off, and see how the financial markets react. Unless there were Chandler Trust tax issues might that not have been a perfect solution for Tribune?

When Dallas-based Belo announced its scheme Oct.1 Wall Street’s euphoria boosted the shares up during the day by some 24% above the previous close, and by the end of the day the shares held onto a solid 18% gain. But there has been a steady decline since then with the shares up now just nine per cent since the announcement. Perhaps “just” is unfair since newspaper companies these days would give their right arms to get a 9% bump in their share prices.

And then in less than three weeks comes along another big multimedia company with its own version of the plan, but with the same goal. For the E.W. Scripps Company it was more of keeping the old traditional business, newspapers and television, in the existing company and creating a new company, Scripps Networks Interactive for the cable TV and comparison shopping business that is really earning the big money these days.

Until around 20 years ago E.W. Scripps was thought of mostly as a newspaper business with some terrestrial broadcasts holdings. But it got in early into the TV network digital revolution with lifestyle networks that are top of their field on such subjects as the home and food. In those relatively short years that part of the national lifestyle media brands business has built up to an annual revenue of $1.4 billion with 2,100 employees, whereas its traditional business of newspapers and broadcasters lags behind with $1.1 billion in annual turnover and 7,100 employees.

Wall Street liked what Scripps did, but instead of the 18% first-day jump the shares finished up 8.6%, still its biggest gain in five years -- a good day’s work from the boardroom.

The message in all of this, of course, is that boardrooms are at the stage where since nothing else has really worked to improve shareholder value -- share buybacks, higher dividends, vicious cost-cutting, even sales are not on because valuations have dropped so much -- the time has come to cut loose that part of the business holding everything else down. The plan now is for the strong to get stronger, get the valuation in the marketplace that stronger business deserves, and not be dragged down by old traditional products that are still doing okay, but not as well as in the past.

One only has to look at Q2 results to understand the Scripps strategy. The Scripps Networks business that now will be isolated saw revenues up 7.6%, while newspaper revenues were down 8.8% and television was down 2.2%. So ring fence the business earning more money and lump together the businesses that aren’t. The traditional business will still have some $100 million in debt around its neck, but the Interactive business will have the bulk of debt at around $465 million.

The quotes coming from Belo and Scripps executives about the newspaper business are not encouraging. Asked in a conference call if he thought the newspaper business will soon improve, the best Richard Boehner, who will run the Scripps traditional media business, could offer was,” We really hope so. This has been probably the toughest 24 months in the history of the newspaper business…It’s hard to tell what the model will look like.”

At the beginning of the year Scripps gave confusing signals that it was thinking of getting out of the newspaper business. Management probably thought that was a good idea but the practicalities of doing so were very difficult given the Scripps Trust ownership that represents so many heirs. So the company finally denied a sale was on and in the meantime it seems to have come up with a middle ground acceptable to all.

As for Belo, an initial document it has filed with Securities and Exchange Commission (SEC) makes for dismal reading. “A.H.Belo’s newspaper properties, and the newspaper industry as a whole, are experiencing difficulty maintaining or increasing print circulation and related revenues. This is due to, among other factors, increased competition from new media formats and sources other than traditional newspapers (often free to users), and shifting preferences among some consumers to receive all or a portion of their news other than from a newspaper,” the document said.

Belo owns four newspapers and their financials are still going in the wrong direction with first-half net operating revenues of $368 million, down 9.6% on the same period a year before. At the flagship Dallas Morning News, for instance, the, H1 operating revenues were down 8.2%, the Riverside (California) Press-Enterprise was down 15.7%, and The Providence (Rhode Island) Journal was down 7.9%. Besides a small newspaper in Denton, Texas, the new company will also own associated Web sites, direct mail and commercial printing businesses — in all some 3,800 workers and annual revenue of about $750 million

The existing Belo company will keep the 20 television stations and their Web sites, as well as Belo's two regional cable news channels. It will have about 3,200 employees and current revenue is also around $750 million. Its H1 revenue was up 2.3% to $376 million.

And in making this corporate change Belo puts the knife into that word that was the buzzword of multimedia companies just a few years back – convergence. The SEC document stated, “The newspaper and television businesses, once thought to be on a path towards convergence, are now moving into different directions as regulatory obstacles to cross-ownership remain and new technologies have altered the media landscape. Certain benefits from combinations of print and broadcast assets and their cooperative activities may be largely accomplished (instead) through various commercial partnerships and alliances.”

The obvious question is that since this now has the makings of a trend who will be next? The most obvious candidate is Gannett, but with newspapers making up close to 90% of its revenue there’s not much to gain, which could be why Chief Executive Craig Dubow said Wednesday a dual listing was still not in the cards. “At this time, no, our position has not changed," he said. That still leaves him the problem of the newspaper division’s advertising revenue falling 6% in the third quarter, especially since he said he expected the real estate slump to continue into 2008.

But now that Morgan Stanley has called “time” on the Times it will take a few days to see if institutional investors in general start giving up the newspaper business. Not helping give confidence is McClatchy’s 55% decline in third quarter profit – it was hurt severely at its Florida and California newspapers where the real estate boom is now a real bust – and it was just the type of news shareholders didn’t want to hear. McClatchy’s shares closed down more than 5% Wednesday to $17.97 – the lowest since the mid 1990s – but they did pick up a bit in after-hours trade.