Sunday, March 18, 2007

No respect

It makes no sense for the Tribune Co. to go into hock to pay a juicy special dividend to the disgruntled shareholders who still won’t respect the company the morning after the check clears.

Yet, that seems to be the path the Rodney Dangerfield of media companies is pursuing, as it seeks to reclaim Wall Street's esteem after failing to find anyone interested in paying a decent price for its seemingly enviable assets.

The latest “self-help plan” apparently being considered by the management of the beleaguered company is to sell assets and/or borrow money to pay shareholders a fat, one-time didvidend to help them feel better about a stock that has declined 43% in the last 26½ months.

But more debt will put additional operating pressure on the company without making the shareholders any happier. So, why bother?

Shareholders led by the Chandler family had their shot at trying to force the liquidation of the company at what proved to be a decidedly inauspicious moment to be selling metro newspapers or television stations.

If restive investors don’t believe the company's performance is likely to improve – or are too impatient to wait for that to happen – they are welcome to sell their shares. Or, they can sit tight and let management focus on the business of running the business, instead of being distracted, as executives have been for more than a year, with such non-productive matters as investor relations, M&A efforts and financial engineering.

Any additional debt incurred to pay the dividend would make it that much harder to turn the company around. Here's why:

While the thrill of a special dividend would be fleeting, the fresh debt necessary to pay it would linger on and on and on, requiring a combination of higher sales or lower expenses to cover the interest owed on the additional borrowed money.

Tribune’s $5 billion debt burden today is approximately 3.5 times its operating profits, a relatively conservative amount that enables the company to enjoy fairly inexpensive interest rates even though its credit rating recently was downgraded. If the company were to take on a significant amount of additional debt, its lenders likely would require higher interest rates to offset the perceived risk of potential default.

Although higher debt requires more operating profits to be earmarked for interest payments, a publisher could handle more debt if its sales were rising. But they are not. Print sales, which still represent better than 90% of most newspaper revenues, fell 3.7% in the fourth quarter of 2006, following declines of 2.6% in the third quarter and 0.2% in the second quarter, according to the Newspaper Association of America.

Given the ongoing weakness in newspaper advertising sales, a prudent management team would have little choice but to whack expenses sharply to assure that sufficient cash were on hand to service its increased debt. Thus, Tribune would be forced to reduce things like staffing, newshole, marketing, new niche print products and digital initiatives at the very time it should be investing prudently in these areas to fend off competition and build for the future.

If a plump dividend check made shareholders happy enough to bid up Tribune’s stock, then it all might be worth it. But it won’t.

A one-time dividend won’t levitate Tribune’s stock by so much as a nickel after the dividend is paid, because investors know the only way the stock will go up in the future is if the company improves its operating performance.

The stock has fallen by nearly half, because the general sentiment at the moment is that the magic is gone for Tribune and most other newspaper stocks. Unless and until Tribune's performance improves, its stock will remain in the doldrums. There are no other rabbits to pull out of the hat.

If Tribune can raise new cash by selling some of its assets (without doing so at fire-sale prices), it should not use the proceeds to pay a special dividend to investors. Instead, the company should invest the cash in strategic initatives to improve its core publishing and broadcasting busineses and to fund the new-media initiatives necessary to compete in the 21st Century and beyond.

Newspaper shares have fallen by $13.5 billion in value in the last two years because investors are concerned, rightfully, about the industry’s long-term potential to sustain its once-reliable sales growth and profitability. But newspaper stocks also are suffering, because investors have become increasingly concerned that most publishers don’t have the vision, courage and know-how to restore their struggling companies to their former strength.

Wads of cash paid to crybaby investors won’t rebuild Wall Street's confidence in the newspaper industry. The only way to revive newspaper shares is by tending to the fundamentals that drive every successful business: Well conceived products that satisfy well defined consumer needs; shrewd marketing and aggressive sales, and disciplined but enlightened cost control.

Tribune and the other publishers can’t buy love on Wall Street. The only route to regaining the respect they have lost is by earning it, the old-fashioned way.


Anonymous Anonymous said...

Everything you say is correct. Your solution, however, needs to be fleshed out. Yes, newspapers need to innovate and offer new, relevant products to the public. But how many are even trying to do so? I know that the New York Times Co. and Gannett have small corporate strategy departments, but I don't know of other large publishers that do. How many have research and development divisions? It's all well and good to say that newspapers should innovate, but it's not just a matter of wanting to - these companies are not structured to change or be creative.

11:13 AM  

Post a Comment

<< Home