Who is Going To Bail Out Newspapers?

Philip M. Stone September 30, 2008

Read all the stories about the US government bailout of Wall Street and what keeps cropping up again and again is that this action just touches the top of the iceberg, no-one really knows how bad things really are and don’t look for any great improvement in the global economy for at least another year. For newspapers, already suffering badly from the economic downturn that news couldn’t be much worse.

A dying breed?

And the headlines about the newspaper industry are beginning to show it. Business Week headlined a story, “What Will Replace Big-City Newspapers”; The Guardian in the UK headlined, “You Can Smell The Fear As Newspapers Brace For 2009” and the Wall Street Journal’s headline about McClatchy renegotiating its debt went “McClatchy Bank Deal Eases Threat of Default”, although the McClatchy flagship Sacramento Bee played it far less dramatic with “McClatchy Co. Renegotiates Its Bank Loans.”

With companies like Gannett and McClatchy, the two largest US newspaper publishers, slashing away at just about anything that moves these days there are plenty of signs that their boardrooms are convinced there is no light at the end of the tunnel, and there can be no question that Wall Street’s problems are also the problems for newspapers, too.  

That’s really a double whammy that Wall Street has dealt newspapers – first it downgraded newspaper shares so much (how much short selling was in there?) that newspapers valuations on the market  are ludicrously low, and now that Wall Street is getting its comeuppance, newspapers suffer again because  if advertisers can’t gain access to credit, lines of credit and all the rest, then they’re going to pull in on what they spend, and that means less advertising spending, especially for traditional media.  It’s as simple and cruel as that.

Reading McClatchy’s statement on its debt renegotiation would indicate it was a pretty close thing that the company was nearing violating loan covenants. That doesn’t mean it didn’t have the money to pay its debt, but things were bordering the limits that lenders had placed on participating in that debt. And the lenders played hardball with McClatchy, drawing their ounces of blood, holding out for a 0.25% interest increase on its bank loans which will cost the company an additional $2.8 million a year, reducing its line of credit under certain circumstances, and placing severe limits on dividend payments.  

McClatchy ran into trouble because its loan agreements called for a debt limitation of no more than five times cash flow. In normal times that’s an easy given. But these are not normal times and with cash flow getting hit really hard – July and August advertising revenues each down 17% over the year before -- then cash flows got much tighter with debt at a ratio of 4.5 times cash flow. Under the new agreement there is more breathing room with that ratio increased to 6.25% through Q4.

A real indication of how bad things are at the end of the year in newspaperland will be to see exactly where McClatchy’s debt ratio ended up. Obviously the company believes it will be more than 5% and that has to send a shudder throughout the industry. McClatchy’s share price has fallen 77% in the last year and its debt is rated at just about as bad as junk can get rated.

But it’s not just McClatchy in debt trouble; newspaper groups everywhere are doing the unusual for bottom-line purposes. For instance in St. Louis the Post-Dispatch laid off 20 employees last week, and according to Shannon Duffy, the St. Louis Newspaper Guild’s business representative, it all had to do with owner Lee Enterprises’ handling of its debt.

She told the St. Louis Business Journal, “They wanted to be able to report the severance in the 2008 fiscal year, but then show the savings in the 2009 fiscal year. Today (September 26) is the last weekday of their fiscal year. This was about bookkeeping.”

And then there is Media General that announced last week it was halving its dividend so the cash could be used to repay debt.

So all of that brings us back to our headline question: Who is Going to Bail Out Newspapers? And the obvious answer at first is certainly not the government, for as much as the money might be welcome there is always the fear that the price would end up being  far too high to pay with government fingers meddling into a free press. But is that the final word?

The fact is that in the US free market forces seem to have been thrown out of the window these days.  Wall Street will get its bailout and Congress has authorized $25 billion in loans for the auto industry, but newspapers are going to have to somehow manage it alone, even though as TV sage Walter Cronkite told journalism students at Columbia University last year, “In this information age and the very complicated world in which we live today, the need for high-quality reporting is greater than ever. It's not just the journalist's job at risk here. It's American democracy. It is freedom."

Are we getting to the point where “democracy” and “freedom” are at risk? Do we let our major newspapers succumb to the forces of the free enterprise system or are newspapers too important to “democracy” and “freedom” to allow them to fail -- we didn’t let the banks fail! Certainly the newspaper  print product is getting thinner – less people producing smaller, thinner issues that are in too many cases are merely shadows of their former selves,  so might we mention at this time that really dirty word “subsidy”.  

The French newspaper industry, for instance, couldn’t exist without government subsidies, and the Swedes, who had hoped to reduce their newspaper subsidies, are now actually increasing them by 10%. "A special support is needed for newspapers with weaker market share so that readers can have real freedom of choice," said Lena Adelsohn Liljeroth, Sweden's Minister of Culture.

There are few places where that quote wouldn’t hold water, too, and in those societies where press subsidies would be considered an anathema, anti-competitive towards other forms of media and all the other standard reasons one can give, at the end of the day, should society allow free market forces to kill newspapers? 

Things are probably getting to the point where that question should at least be debated.