Debt For Many Newspapers Is Public Enemy #1

Philip M. Stone April 9, 2008

On the face of it the Journal Register Company should be financially okay. It owns 22 daily newspapers, has some 310 other newspapers including small weeklies, and earned last year $90 million before tax, interest, depreciation and amortization. It only had to pay $38.5 million in debt interest, well less than it earned, it reduced debt by $105 million and it has no scheduled principal debt payments due until Q2, 2009. It’s listed on the New York Stock Exchange. So what’s the problem? How about $625 million of debt!

The company announced this week it had hired Lazard Frères to investigate various options (thought to run from bankruptcy to selling assets) and its shares closed on the NYSE Tuesday at all of 25 cents. There are not many newspapers you can buy at the newsstand for 25 cents, but you can buy one share of the Journal Register Company! There are those who think at that price the shares might be worth a flutter – they went up 13.64% on Tuesday, or put another way, they rose 3 cents, but it is probably risky at best.

With newspaper  valuations falling as much as they have over the past couple of years the thinking on Wall Street is that if the company sold everything it has it would just about cover the outstanding debt with not much if anything left for the shareholders, and thus the 25 cents valuation for those wishing to take a real gamble – they had touched 16 cents a share on Monday, so 25 cents is up from that low by 56% proving there was still money to be made from newspaper shares if one had a strong stomach.

The shame of it all is that the company would actually be weathering the current newspaper storm rather decently if it wasn’t for that debt, and it goes to show how just one mistake can bring a company to its knees. Back four years ago, in a flurry of praise from its bankers, Journal Register borrowed some $415 million to buy four daily newspapers and 87 non-daily newspapers in Michigan, home to the US auto industry. They went and bought newspapers in Michigan?

Yes, they did -- the very same Michigan that today tops the US unemployment charts and home foreclosures lists. The automobile industry is cutting back like crazy and as for those Michigan newspapers, well let’s just says they are not doing very well in attracting advertising revenue these days.

When the Detroit Economic Club recently gave a presentation to high school students it readily admitted the state was in recession (neighbors are out of work but business continues, if slowly) and the aim now is to stop recession turning into depression (everyone is out of a job as well as out of business). Not a great environment to be making money, and that Michigan buy just four years may well bring down the company as some financial analysts believe that with earnings forecast to drop this year by some $20 million that debt covenants could get breached by Q4 of this year. And, of course, the credit agencies don’t make life any easier with S&P saying it is looking at downgrading the company’s  debt ratings.

In hiring Lazard Frères the company said  executives were “concerned  about the state of the overall economy and the environment for print advertising.” That kind of statement makes one wonder if the bankers could unload the company at even the debt owed.

And why would anyone want to buy a newspaper anyway? The somewhat surprising answer is that they are still cash cows. They don’t produce the 30% margins of a few years ago but the average last year was 17% and it could well be said that type of number is looked at with some envy by other industries. Everyone knows how tough it is out there for print these days, but if there is not an overwhelming debt hanging around one’s neck then the newspaper business is still not a bad place to be. And with prices down as much as they are – it is said that many dailies are probably worth only about half of what they were five years ago – then the debt could be manageable.

The secret to success, of course, is not only to have enough money to handle the debt payments but enough to tide the newspaper past the bad times.

Reduced cash flow is causing Sam Zell problems he didn’t think he would need to manage in handling the $13 billion of debt that Tribune now owes. He has put Newsday up for sale when he previously had said he did not envisage dumping assets besides the Chicago Cubs baseball team and the Wrigley Park Stadium. But the baseball sale may take longer than expected because he is trying to sell the team and stadium separately rather than as a package, and with cash flow down 30% over a year earlier Zell is now hustling to ensure he has the money on hand for December’s first $600 million payment. There is considerable feeling  in the financial community that Tribune will  fall foul of its debt covenants in 2009 although it’s hard to believe Sam Zell would do everything he has done so far just to be thrown out at second base.

In Philadelphia, where locals bought the two newspapers from McClatchy in June, 2006 for some $515 million  the struggle has been ever since the ink was dry to ensure the bank payments could be met. Advertising revenues were down and thus vicious cost-cutting was the order of the day. But the latest attempt by management to save some money has now ended up in court with the newspaper guild suing to stop a merger of two pension plans – one fully funded and the other vastly underfunded.

McClatchy took an impairment charge of $1.47 billion in Q4, 2007, and that followed a $1.37 billion impairment charge the month before. The company that in 2006 paid some $4 billion for the Knight Ridder newspapers it kept now has a market capitalization of $861 million and it is being closely watched by the ratings companies because although McClatchy debt is strongly in the junk arena there is beginning to be some fear whether the company can maintain the liquidity to service that debt if the advertising reductions at its California and Florida newspapers continue.

And then there is Lee Enterprises that owns 50 daily newspapers  and a joint interest in five others, and more than 300 weekly newspapers and other publications. It bought the Pulitzer newspapers, including the flagship St. Louis Post-Dispatch in 2005 for $1.46 billion and says now it is going to take a non-cash impairment charge this quarter of some $500 - $700 million. Its market capitalization after all that stands at just $480 million – about one-third of what it paid for the Pulitzer newspapers.

Rutherford B. Hayes, the 19th President of the United States, may have got it right more than 100 years ago when he said, “Let every man, every corporation …get out of debt and keep out of debt. It is the debtor that is ruined by hard times.”