Credit Agencies Warn Declining Newspaper Revenue Threaten Debt Agreements, Or In Layman Terms, Who Was Expecting An 18% Downturn?

Philip M. Stone March 25, 2008

Standard and Poors put it this way about Dean Singleton’s Media News: “We are concerned that lower EDITDA may lead to a violation of the leverage covenant in its bank agreement over the near term.” Or as Sam Zell simply explained for why Tribune may now consider selling newspaper properties, “We started with the assumption that print would be down two or three per cent this year, not 18%.”

What both quotes translate into is that the enormity of the downturn which really bit hard starting in Q4 – and things were pretty rotten before then -- has many US newspaper publishers throwing out their 2008 economic assumptions, and for increasing numbers of newspapers their talk now is how to stay one step ahead of the banks.

It’s not that the margins still aren’t there – certainly not as big as before but still in percentage double figures -- but what is killing some newspapers now is that their revenues have declined so much that debt obligations that before seemed manageable are now eating so much of the available cash that there’s not that much left over. 

And since in this environment selling really isn’t an option, unless there are special circumstances  such as Murdoch willing to pay what it takes to get his hands on Newsday because of synergies with his New York Post. In normal circumstances any newspaper sale in today’s environment would be at drop-dead prices, so publishers therefore will do what publishers have been doing viciously for the past few years, but now even more so than before, and that is cutting costs even more.

For those newspapers that have huge debt loads to service – think Minneapolis, Philadelphia, Media News, Tribune – the number one concern for those publishers is how to keep promises in debt covenants including that debt levels would decline at pretty much the same levels as revenue declines. But as Zell said, who figured on 18% revenue declines?

It’s all well and good to complain that newspapers are biting off their own noses to spite themselves by cutting back so much on the print editorial product that readers will quit in ever larger numbers, but the fight now for those newspapers heavily in debt is coming down to one of survival. 

Thus there is the spectacle in Minneapolis, for instance, where the newspaper has held three days of closed meetings with unions in which the management has called the newspaper’s revenue decline “precipitous” and says the newspaper is at a “crossroads”.  In layman’s language, 80% of its profit goes to paying off debt. Not much left over (around $8 million) to keep for a rainy day with continuous thunderstorms the forecast.

And the story of the Minneapolis Star Tribune (Strib) is really a tragedy. A proud newspaper under Cowles ownership, McClatchy’s offer of $1.2 billion in 1998 was an offer that just couldn’t be refused.  McClatchy had a few good cash cow years but by 2006 it understood that owning large metropolitan newspapers with feisty unions and declining revenues was not the place it wanted to be, so having disposed successfully 11 Knight Ridder newspapers it didn’t want, it closed 2006 with a fire sale for the Strib, selling it to private equity firm Avista Capital Partners for $530 million of which around $400 million was borrowed.

Everyone at the time marveled at Avista’s great bargain, and criticized McClatchy for selling out so low (it did ok because of tax benefits tied into the sale). But McClatchy may have the last laugh in Minneapolis because nobody figured (and that has to include McClatchy or surely they would not have bought Knight-Ridder) that things would get so much worse for newspapers, so bad as to put the debt payments in jeopardy.  There already has been plenty of cost-cutting since the sale but apparently not enough and the three days of meetings make clear that something dramatic now needs to be done.  Publisher Chris Hartke said the Strib’s current financial difficulties result from a precipitous drop in revenue while expenses have remained virtually flat and he emphasized that expenses will have to be cut to get through the immediate financial challenges.

Expenses virtually flat? This from a newspaper that reported early last year after the McClatchy sale, “Bowing to the pressures of declining circulation and falling revenue, the Star Tribune announced a sweeping program of buyouts that will send 145 employees -- including 50 in the newsroom -- out the door through buyouts or layoffs….”

Elsewhere, even though Standard & Poors has reduced MediaNews debt rating a couple of times in the last 30 days and made all sorts of noises about the company perhaps not keeping to its debt covenants, it also points out that the company is masterful at getting new capital when necessary – could Hearst be enticed to increase its MediaNews relationship?

“Lean Dean” Singleton, meanwhile, is losing no opportunity to save costs. He has combined backroom operations for most of his Northern California newspapers, he has editorial supplying stories to sister publications that were once competitors covering the same beats so now there is no overlap – and very little competitive reporting of local issues – and in Southern California he basically dumped the Long Beach Press Telegram with its 88,000 circulation – for many years a real Ridder advertising powerhouse  even before Knight came along – into its neighborly South Bay Daily Breeze with circulation of 65,000  and everything is run out of the Daily Breeze’s Torrance  headquarters, 10 miles (16km) north of Long Beach.

Everyone knows that once Sam Zell got his hands on Tribune he wasn’t about to screw up the investment by missing debt payments or falling foul of debt covenants. But whereas before he had a “no sale” sign on the newspaper properties, apparently he has now hung out the “For Sale” sign on Newsday.

Rupert Murdoch would love to get his hands on Newsday (competition authorities allowing) for the synergies (read: savings) it could bring to back office functions at his New York Post that still loses millions of dollars annually. That’s probably why Mort Zuckerman, publisher of the New York Daily News, has also expressed interest, and thus with that kind of competition Newsday may be the one newspaper (the Los Angeles Times possibly a second) where the going price could be higher than financial market value.

When Murdoch wants something badly enough he’s not afraid to pay over the odds (the $5 billion plus for Dow Jones proved that yet again) and Zell and Murdoch have been discussing Tribune newspapers in California and Florida possibly printing the Wall Street Journal so one could almost see a win-win deal in the making.

For those newspapers without the benefit of a group behind them, that are trying to stand on their own two feet, the job is becoming increasingly difficult. Everyone understands the web is the future but the problem is that these print entities can’t wait for web revenues to be where they need to be. And with the financial markets as skittish as they are these days this is no time to give bankers an excuse to call in the loan.

The end results will be more of the same – print newspapers will continue to cut expenses, some of which we the readers will notice and some we won’t, their editorial and advertising product will continue to deteriorate, and eventually we readers will reach the point where we decide we are no longer getting our money’s worth and we all go elsewhere. The gamble for publishers is just how much deterioration we will accept before we truly abandon ship?