Be careful what you wish for

The bad news for the newspaper business is good news for publishers whose shareholders a year ago would have been demanding their assets be sold to the highest bidder.

With circulation, ad revenue and profits in freefall – and no bottom in sight – there’s no one around today to bid for the assets of such troubled companies as New York Times, McClatchy and most of the rest of the publishing group.

This grim reality, plus a freshly frozen M&A marketplace, has silenced the dissatisfied investors who forced the liquidation of Knight Ridder in 2006 and the agreement earlier this year to take the Tribune Co. private in a still-pending highly leveraged transaction.

But the good news for publishers – that no one is demanding their liquidation any more – is also bad news, because it means they will be stuck tending to the massive and so-far insoluble problem of cauterizing the sales losses that have eroded profits at a quickening pace for the better part of two years.

Publishers who had hoped to be left alone to manage their companies – as opposed to the fortunate few who exited KRI with $57 million in parting gifts – know the true meaning of being careful about what you wish for.

Investor pressure came off NYT Co. this week when Morgan Stanley quietly dumped its stock after lobbying unsuccessfully for nearly two years to eliminate the two-tier ownership structure that gives the Ochs-Sulzberger family more control over the company than enjoyed by public shareholders.

Morgan Stanley’s capitulation means the NYT Co. has no particular incentive to go private, a possibility raised here in April. It’s a good thing, too, because the poor performance of the company’s publishing properties and now-fallow debt market would make it all but impossible for NYT to raise the money it would need to cash out its public stockholders.

Morgan Stanley wasn’t the first of the once-aggressive newspaper investors to sell its shares and slink away. As reported here earlier, Private Capital Management, the investor that forced the breakup of Knight Ridder, has been in the process of unloading billions of dollars in shares of not only NYT but also McClatchy, Belo, Lee, Media General and Gannett.

The outlook for newspapers is so scary that even two diversified media companies who grew up in the publishing business are jettisoning their newspaper properties. Belo and Scripps are forcing their newspaper properties to fend for themselves in soon-to-be-created, free-standing companies, thus insulating their healthier broadcast, cable and interactive assets in separate entities.

Gannett, which has a fair ration of television properties in its portfolio, says it has no plans to do the same. But I wouldn’t rule it out.

Meanwhile, McClatchy, the largest pure-play newspaper publisher, is getting ready to write down a substantial portion of the $4 billion it paid for the two-thirds of KRI that it kept when it bought the company scarcely 15 months ago. McClatchy is still working through the complex accounting calculations required to mark the fallen value of KRI’s assets to current market conditions.

But this will give you a sense of how far things have fallen. The 35 million shares of stock McClatchy issued to buy KRI are carried on its books at a value of $1.8 billion, or $52.06 per share. With the stock having closed today at $17.97, those shares are worth a bit less than $629 million, or fully 65.5% less than when the deal was struck.

How’s that for depressing, fellow shareholders?