Wall Street Changes Tact On US Newspaper Shares – It’s No Longer About Increasing Shareholder Value But Rather It’s All About Survival

Philip M. Stone July 11, 2008

There’s just no way newspaper companies can please Wall Street these days (unless they produce higher advertising revenues) and it’s pretty obvious now that all of the previous bowing to the demands of the financial wizards to go deeper into debt to increase shareholder value via larger dividends and more share buybacks now seems to have been exactly the wrong policy at the wrong time. The shares of most are now at lows for this century and there is a genuine feeling that some well-known names may disappear.

And even the strongest are being nailed. About the only reason for New York Times management to raise their heads these days is to watch people literally climbing the facade of their new headquarters. Everything else is down and its share price took a walloping this week, down 7% on Wednesday and another 2.78% Thursday after a Lehman Brothers analyst really let loose saying the NYT’s dividend was too high, it’s share price is too high in comparison to the slaughter going on with McClatchy and Gannett shares, and the company should work harder reducing its $1.05 billion debt using funds saved from a lower dividend. And, oh yes, it should invest more in Internet sites.

“We think the shares have significant further downside risk over the next year as the stock is the most expensive in the newspaper group, plus Wall Street estimates remain way too high in our opinion,” blasted out analyst  Craig Huber. And with that shares dive-bombed 9.6% over two days to close Thursday at $13.62, they haven’t been that low since September, 1995. But Huber stuck in the knife more with a forecast the shares will drop eventually to $8, down from his previous forecast of $12.

He blasted the dividend, “We think the company’s dividend is at risk of being cut over the next few years and think the company would be much better served using the $133 million annually to instead pay down debt,” Huber said.

The New York Times Company has really tried in the past to increase shareholder value as recommended by Wall Street, With the company’s two-tier share system the A shareholders are in the vast majority but have very little say over the direction of the company since the board’s majority is made up members elected by the B shareholders – mostly Sulzberger or Ochs family. But the A shareholders had been making ugly noises and needed to be appeased.

Thus last year the company increased debt via higher dividend payments (in June, 2007 the rate was upped 31%), it has completed share buybacks, and it sold its nine TV stations for $600 million. Three years ago it bought About.Com for $410 million that is probably worth at least three times as much today, and to control costs it has even cut back editorial staff.

But management does seem to have had a blind spot: Boston.  It bought the Globe in 1993 for $1.1 billion. Wasn’t long after that the New England business climate became very cold and the Globe has been cutting back on costs ever since.  But late in 2006 a group of investors led by former GE Chairman Jack Welch made soundings that they had valued The Globe at between $500- $600 million and they wanted to make an offer, but the Times management kept emphatically saying no. But the company did bite one bullet by revaluing down its New England newspapers by some $800 million – most of that for the Globe – but still it said the Globe was not for sale.

Not that anyone would want to buy it today for that $600 million,and the prospective buyers from two years ago have beaten a hasty retreat, probably thanking God every night that the Times didn’t sell. All they had to do is see what happened to buyers in Philadelphia and Minneapolis, even with Sam Zell’s Tribune buyout, that not only have valuations gone way south in the past year, but that with advertising revenues down so low it is very very difficult to meet debt payments these days.

At the time when they could have sold the Globe it seemed Times management were wearing blinkers for outside the forest the Globe sale seemed the very smart way to go – the $600 million could have paid down debt and the tax losses could have been put to good use . But management apparently gambled on print’s future – that metropolitan newspapers would eventually recover financially and the Globe would start producing again. Knowing what they do now would they have made the same decision then?

Even with valuations falling as much as they have there seems to be few if any buyers out there. Murdoch tried to sell the Ottaway newspapers and found no takers at a price he could stomach, and other groups have newspapers on the block but again, no takers at anything approaching a decent price.

For as bad as things seem now, the prognosis is that they will get worse. Banks have tightened their loan restrictions (although Zell recently got a $300 million loan from Barclays Bank using accounts receiverable as collateral), and prospective buyers now actually understand that borrowing money to buy a newspaper is one thing, earning enough revenue from that newspaper to meet the debt payments may well be something else.

So with newspaper shares really tanking (Gannett closed Thursday at $18.47, down 2.74% on an up-market day; McClatchy closed at $5.07, down 4.52%) Wall Street seems  to have thrown in the towel somewhat – it’s not about shareholder value these days – that is long gone for most – but rather it’s all about survival, especially at a time when even growth at newspaper online sites is slowing, too.

Newspaper share prices are absolutely silly these days, and yet there seem to be far more sellers than buyers.

Not a good sign.