Here Come the Death Eaters

2008 is not going to be pretty in the newspaper business.

As bad as the past couple of years have been, the coming year is very likely to be worse (and 2009 could be worse than that). The structural rot that has been afflicting circulation and revenue is worsening, online revenue is stagnating, and to top it all off, the economy is heading into the tank. That subprime mortgage crisis? Hell on real estate advertising, and indirectly on most every other kind of advertising. Not pretty.

Put that all together, and 2008 may be the year that the Death Eaters start coming for some of the biggest names in the business: Big chains or papers that are overextended financially and find themselves undermined by the gathering storm of problems. Wall Street and bankers aren't going to put up with that, and executive heads—not to mention those of a lot of unfortunate rank and file employees—will roll. Watch for still more consolidation and, um, innovative financing that will further roil the industry.

Just look at the tumult that accompanied Sam Zell's closing of his deal to buy Tribune Co. this week. The bankers were squeezing the deal right up to the last minute. Even Zell called it "the transaction from hell." And Zell's going to have to pedal—and peddle—as fast as he can to keep the company afloat financially. It's not just the Chicago Cubs that are going to be sold by Tribune. Look for a fire sale of real estate and newspapers (Los Angeles Times, anyone? Anyone?) as Zell strips the company for cash. And at this holiday time, say a prayer for the poor Tribune employees, who could be left holding the bag—through their retirement plan, which now owns the company through Zell's creative accounting—if things turn sour. Memo to Tribune employees: Get. The. Hell. Out.

And then there's McClatchy, long one of the best companies in the business, which is now suffering severe indigestion from last year's acquisition of Knight Ridder (what were they thinking?). Of all the big newspaper chains, McClatchy may have been the best—it's run by good people, and it has a commitment to top-notch journalism. But in the wake of devouring Knight Ridder, it's struggling. Its November ad revenue was down 9.2 percent, quickening a pace of decline that was already running at 8.5 percent for the year.

Even worse, McClatchy's stock market value has cratered. Consider this (courtesy of Forbes): Nearly 10 years ago, the company paid $1 billion for the Minneapolis Star-Tribune. (Remember that number for a moment.) It paid $6.5 billion for Knight-Ridder, and then began selling properties to pay the tab—including unloading the Star Tribune for just over $500 million.

With revenue falling like a stone, Wall Street is not pleased: McClatchy's total stock value has plunged 80 percent in less than three years and is now just a hair over, you guessed it, $1 billion. Ten years ago, that amount of money would have bought you a pretty decent Midwestern newspaper. Now it will get you an entire chain.

"No, I don't think the sky is falling," McClatchy CEO Gary Pruitt sunnily tells Forbes. "Certainly newspaper stocks are out of favor on Wall Street. That's happened before, and that will happen again. But we're not going to go away."

Uh-huh. Try telling that the to Death Eaters. Because they're coming.

Comments

[knackeredhack]

As a journalist and editor, I used to loath this time of year because convention dictated the need to write prediction stories. I doubt many papers will be predicting their own woes this year, and I agree with you that the suggestion this situation is cyclical is laughable. It's Schumpeterian.