It’s difficult to go digital when facing a debt default. Some of the nation’s largest newspapers are behind the times technologically, partly because they gobbled up additional newspapers instead of spending money on electronic advances. Now the digital media revolution has accelerated startlingly, and those papers, laden with leverage and facing an economy in recession, don’t have the money to get ahead of the curve. San Diegans have a front-row seat for this phenomenon.
According to Bloomberg News, U.S. newspapers’ print advertising sales plunged by 14 percent in this year’s first quarter from a year earlier, the biggest drop on record, largely because of weak real estate and employment markets and the loss of business to the Internet.
This is surprising, because 2008 is a so-called quadrennial year. Print advertising is supposed to get a nice jolt because of the presidential election and the Olympics. Metro newspapers are being hit the worst by far, but other media aren’t doing so hot: according to advertising economist Jon Swallen, advertising spending on network TV over the past 12 months is up a mere 0.8 percent. Ditto for magazines. Radio is down 4.5 percent and local radio down 7.2 percent. Keep in mind that the U.S. population is growing at about 1 percent a year.
The Internet is growing rapidly, but revenue of online operations run by newspapers rose only 7.2 percent over the past year, the smallest gain since the Newspaper Association of America began reporting papers’ online sales growth four years ago. Newspapers don’t make anywhere near as much money on online ads as they make on print ads. Online revenue is still less than 10 percent of newspapers’ total ad sales.
As a consequence of all this, newspapers’ earnings, if they exist, are strained. Stocks continue to plunge. In April of last year, San Diego’s privately held Copley Press sold nine newspapers in Ohio and Illinois to upstate New York–based, publicly held GateHouse Media for $382.5 million. Since then, GateHouse’s stock has plunged 85 percent. It’s now below $3. Astonishingly, the company has not dropped its dividend. The yield is almost a staggering 33 percent. I asked the company’s vice president of investor relations, Mark Maring, if he gets any questions about that yield. “Every day,” he joked.
Don’t expect that dividend to last. In its most recent quarter, GateHouse lost $27 million, double its loss of the same quarter a year earlier. GateHouse, which mainly has papers in small (often monopoly) markets, was not expected to be hit as hard as companies owning big metro dailies. But it piled up too much debt making too many acquisitions.
In a similar fix is Iowa-based Lee Enterprises, which was supposed to feast on its collection of smaller papers with little competition. (One exception is San Diego’s North County Times, a Lee paper with lots of competition.) But Lee piled up a lot of debt to buy a big paper, the St. Louis Post-Dispatch, along with too many smaller ones. In its most recent quarter, Lee lost $713 million. In the quarter a year earlier, it had made $11.2 million. A year ago, the stock was above $20; now it’s around $4. The dividend yield is above 17 percent. Obviously, that won’t remain. “Lee Enterprises’ financial health is poor,” says analyst Tom Corbett of Morningstar, a stock-rating firm. “Lee has assumed a substantial debt load from its earlier acquisitions, and the company is closing in on the upper limits of its debt covenants.” (That is a polite way of saying that it could default on its debt.)
But there may be really big default news in the offing. Bond-rating firm Standard & Poor’s says Chicago’s Tribune Company could face default by the end of the year. This company, which owns the Los Angeles Times, is burdened with excessive debt as a result of a kinky buyout engineered last year by real estate baron Sam Zell. The deal left the company saddled with $13 billion of debt. It must sell assets to survive. One of those assets is the Chicago Cubs baseball team, along with its historic stadium, Wrigley Field. The Cubs, who haven’t won a world championship for 100 years, finally have a good team and might face the indignity of being sold when they have the best team in a century. The Tribune wants the State of Illinois to buy Wrigley Field, but that deal appears likely to die. “We think [default is] a possibility as early as December,” Standard & Poor’s analyst Emile Courtney told Bloomberg News.
Philadelphia Media Holdings, owner of the Pulitzer Prize–collecting Philadelphia Inquirer, defaulted on $85 million of its debts in early June. This company took over the famed newspaper after the McClatchy Company bought Knight Ridder in 2006 and then dumped some of the papers. At the time it bought Knight Ridder, McClatchy stock was around $53. Now it’s below $7 and yielding 10 percent. The company’s bonds are rated junk (noninvestment grade), although not necessarily in danger of default. In March of last year, McClatchy sold the Minneapolis Star Tribune for $530 million — less than half of what it had paid for it seven years earlier. The private equity group that bought the Minneapolis paper, Avista Capital Partners, is now denying that it is on the brink of bankruptcy. Avista had borrowed $450 million to do the deal and has watched as the paper’s annual revenues have fallen by $75 million, says the trade publication Editor & Publisher.
According to Editor & Publisher, among other newspaper groups whose bonds are rated junk or a notch above are Freedom Communications of Orange County and MediaNews Group of Denver.
MediaNews, owned by William Dean Singleton, has been rumored to be a potential buyer of the Union-Tribune. In late 2006, Hearst Corporation bought the Torrance-based Daily Breeze, which covers the area from LAX to the L.A. Harbor, from Copley with the idea of transferring ownership to MediaNews, which is operating the paper. But MediaNews’s debt rating has been lowered several times, and default is a possibility, says Bloomberg. On June 18, the chief executive of closely held Hearst resigned. There are rumors that board members thought he spent too much money on newspapers (such as investing $288 million in MediaNews) and not enough on online ventures. Bottom line: MediaNews will have to strengthen its balance sheet greatly to buy Copley. Tribune and Lee, once considered candidates to buy the San Diego paper, are out of the running.
Copley once had a pristine balance sheet, because Helen Copley and her selected board members had an aversion to debt. The younger management was contemptuous of this prudence and finally persuaded her to take on debt to buy Ohio and Illinois papers beginning in the mid-1990s. It sold those papers to GateHouse last year, but the ailing chain did not assume Copley debt. Copley claimed it sold the papers because of tax obligations from the death of Helen Copley, although many insiders doubt that explanation. The question is whether Copley paid off its debt after it sold the papers to GateHouse. The company did not respond to a query.
In a speech on June 2, Singleton said that 19 of the 50 largest U.S. newspapers are losing money, and the number will grow. Some experts predict that a couple of dailies will fail within two years; some will cut out certain of their editions, such as Mondays and Tuesdays. The companies have to shell out money to service debt while revenues decline but must spend money to be competitive online. To slash expenses, there have been massive industrywide layoffs. Employees who had nothing to do with the dubious decision-making are left holding the bag, and their heads are inside that bag.