The Vultures Are Circling

Let's think the unthinkable. Some of the biggest names in the newspaper industry are on the verge of becoming financial casualties. The results may be something that none of us recognize as newspaper companies.

Caught in the perfect storm of technology-driven industry structural upheaval, chronic mismanagement and the economic downturn, the values of publicly owned newspaper companies are reaching historic and dangerous lows. 

As documented by Alan Mutter, the market value of the nation's big newspaper companies has slumped $3.9 billion in just the past couple of weeks and $27.7 billion since the first of the year. By Mutter's reckoning, 10 of the companies combined–including industry household names like The New York Times Co., A.H. Belo, Lee, McClatchy and GateHouse–are now worth a total, yep, all together, of $3.6 billion. Stunning.

It gets worse. As GateHouse shares nicked the $1 level yesterday (total market value: about $59 million), one Wall Street analyst yesterday opined that the company's stock may now be worthless–yes, worthless–"because of the company's exposure to a challenging advertising environment, a debt-heavy balance sheet and declining cash flows." At the same time, an investor in Journal Register (market value $6 million), indicated that he was pulling back from an offer to put a fresh $25 million into the company because management has been, ahem, uncommunicative with him. And shares of Gannett–not one of the Mutter 10 but now worth just $3.7 billion itself–are trading at a 17-year low.

This is a financial crisis for the industry of mammoth proportions. It's worsening by the day. And the vultures are circling. 

Who are the vultures? Investors who will swoop in and try to grab the assets of a distressed company at rock-bottom bargain-basement prices–and let's face it, these are some bargains. Some of these companies can be had for a billionaire's pocket change. Forget the fantasy about Google buying the New York Times; the Silicon Valley behemoth could pick up the entire industry for what amounts to petty cash. (Caveat: Some two-tier corporate stock arrangements will fend off takeovers, at least for a while.)

But professional bottom feeders aren't stupid. They're not going to buy these troubled companies as going concerns. The fundamental businesses are too damaged. Instead, they may look at purchasing newspaper companies on the cheap and doing surgery on them that will make the current run of layoffs and cutbacks look like benevolent ownership. Journalism be damned: To survive, these companies may have to be essentially strip-mined, broken up for parts, transformed to run as cheaply as possible. And you thought newspaper managements already were cheap.

Another alternative: A string of bankruptcy filings. That will buy some time, but again, would be accompanied by deep, deep cuts in operations. Not pretty.

Or maybe somebody will buy a newspaper company and take a fresh look at it–and I don't mean that in a positive, "let's invest in good journalism" sort of way. Rather, an investor might look at a newspaper company and see not newspapers but local advertising sales forces, or local delivery services, or local printing plants–and reconstitute the companies to focus on those assets and operations. Bye-bye newspaper, hello local ad reps pushing Yellow Pages, Google AdSense and Yelp ads to their erstwhile newspaper advertising customers.

Don't think it's possible? Look at the numbers assembled by Mutter again. These once-great companies are bottoming out. The sharks are circling. The horrors of the next few months may make the last few months look like a golden age–except to savvy investors who try to wring the last few pieces of gold out of those downtrodden newspaper companies.

Comments

[ed]

The only thing saving newspapers today is that who wants to buy a big honking ink press these days, when the alternative is cost-free Internet publishing?
The coming carnage will be horrendous once the bankruptcies start cascading, and I have been wondering what the newspaper landscape might look like two years from now.
When Zell's empire falls apart, will anyone pick up the L.A Times or will the winners be the suburban papers in the surrounding counties. Ditto with Philadelphia. Will Seattle Post-Intelligencer overnight become the leading paper in that city, as Blethen's now dominant Seattle Times falls apart because of the $100 million debt-riddled Blethen New England venture? Does anyone want Billy Dean Singleton's scavanged remnants, and will the Rocky Mountain News just allow the Denver Post to collapse rather than offer a buy-out? Is Miami going to be only left with Spanish-language newspapers? What will happen in Charlotte or Raleigh-Durham after MNI collapses, and should I care? Does the arch-conservative Richard Scaife become the dominant publisher in Pittsburg, and should I care? Will there be a future for the Chicago Tribune after Sam Zell? Will there only be papers for the elderly and Canadian snowbirds in Florida after the Orlando Sentinel and Ft. Lauderdale papers hit the bankruptcy markets? And, of course, the biggie: can the NYT survive after the Sulzberger family departs?
Wow. What an exciting period to be in newspapers. It does give Potts something to write about.

[Guy McCarthy]

Sorry, but like Ed I don't really have many comments, just questions.

The nation's biggest newspaper companies have lost $27.7 billion in value since Jan. 1?

And 10 of them together are now worth just over one-fourth of their value three and a half years ago?

If Mutter's math and reporting are correct, when do the bankruptcies begin?

Or are these just numbers on paper that don't reflect reality?

And where are the Media News Group numbers?

Since Singleton chairs the AP, what does this mean for the Associated Press?

I worked 15 years for dailies in California and Florida and I now work part-time for a regional wire service.

You describe yourself as an innovator. What advice do you have for the thousands of unemployed reporters hitting the bricks these days?

[Mark Potts]

Bankruptcies, as I indicated in the post, are indeed possible. And I've written in the past about the outlook for journalists transitioning into other jobs and industries, which I believe is bright: http://recoveringjournalist.typepad.com/recovering_journalist/2007/09/life-after-jour.html

First and foremost, though, newspaper journalists need to absolutely understand that print is not the only outlet for their talents, and they need to be moving as quickly as they can to acquire Web skills and experience. That seems obvious, but unfortunately, in too many newsrooms there are too many holdouts who still see the Web operation as a junior partner. Rather, it's likely to be a more secure place of employment going forward.

Oh, and Media News Group is not included in Mutter's analysis because it's a private company; its stock is not publicly traded and its financial data is not filed with the Securities and Exchange Commission. But the company is believed to be struggling financially along with the other newspaper companies.

[ed]

xxxwhen do the bankruptcies begin?xxxx
At the point where revenues don't cover the expenses and payroll, and they can borrow no more money. Alan Mutter had a very ominous post recently about the Tribune getting what amounted to a $300 million payday loan. The Philadelphia Inquirer, Avista (Strib) and Billy Dean Singleton's MediaNews are already in technical default by not having sufficient revenue to make payments on part of their debts to so-called secondary debt holders. That is a death rattle. If Gannett's report this week that revenues declined a third in the 2nd quarter are replicated throughout the industry (and there is no reason to believe they aren't), judgement day is approaching very fast. Even with bankruptcy, things could drag on for a while as they try to restructure their debts to continue operating as a slimmed down company, or sell off some properties to raise cash. Note that even after bankruptcy, UPI still lives today, and the Washington Post was bought by Kay Graham's father at a bankruptcy sale.

[Darian]

an interesting story on Techdirt about a newspaper company that is succeeding (because their focus is on hyper-local):

http://techdirt.com/articles/20080717/0308161704.shtml

Don't know what their online strategy is, but I wouldn't be surprised if they also have started thinking that through. The medium may not be as important as the message...

[ed]

It just occurred to me that this coming Sunday, I have the choice of spending $1 to buy a paper, or $1 to buy one share of a giant and powerful newspaper company. For about $4, in the neighborhood of the price of the Sunday New York Times or the tabloid Barron's, I can buy a share of the McClatchy company that owns newspapers monopolizing the markets of Miami, Fort Worth, Sacramento, Anchorage, Lexington and one that covers the entire state of Idaho. If I hit Megamillions just right, I could also buy up all the publicly-traded shares of that company for around $360 million, and demand to sit on the board of directors with the family that controls the rest. Wow, I could be William Randolph Hearst and use my clout as semi-owner of all those newspapers to be a king-maker. All that, and little me. Wow.