Wednesday, September 10, 2008

What’s going on at McClatchy?

Seeking the meaning of Gary Pruitt’s sudden resignation from the family trusts that control McClatchy, the Wall Street Journal speculated that the move foreshadows an initiative to issue millions of new shares to pay off the company’s billions in debt.

The Journal might be right. But I doubt it. Here’s why:

MNI has $2.1 billion in debt. Its shares nowadays are trading at about $3.30 apiece (only 18 cents above today's new 52-week low). To sell enough stock to pay all that debt, the company would have to issue 636.4 million new shares, or 7.7 times more stock than the 82.4 million shares outstanding today.

This would result in massive dilution not only for common shareholders like me, but seemingly also for the members of the McClatchy family, who own the super-voting stock that controls the company. Although a common shareholder might have no choice in the matter, this hardly seems like an appealing outcome for the family controlling the company, either.

But wait. It gets worse.

If MNI announced a plan to issue more shares, investors would pummel the stock from its already low price to even lower lows. If the price of the common stock fell by, say, half, then the company would have to issue nearly 1.3 billion new shares, or 15.4 times more than today’s float. This would double the dilution, making the deal even more unappealing to both classes of shareholders.

And then there’s the minor matter of who would buy these new shares. Given the awesomely bearish view of the newspaper business among investors, where would MNI find someone to buy $2.1 billion worth of new stock?

UPDATE: 9.10.08: In a press release issued at mid-day today, Gary said his departure from the trusts "should not be taken as a precursor to any move by the company or McClatchy family, including taking the company private or altering its capital structure."

Now, it’s entirely possible this is going to come down exactly the way the Journal says it will – or that nothing will happen at all.

But I still think, as originally reported here, that Gary’s exit from the trust signals either (a) the company is headed down a path to be taken private or (b) Gary is in the process of being ejected as the chief executive, a position he has held since 1996 (sitting simultaneously as one of the four directors of the family trusts for the last five years).

The above scenarios, BTW, are not mutually exclusive.


Anonymous Anonymous said...

You are asking the same questions that I am, Alan. Who in their right mind would buy stock in a dying newspaper company floated in this down market? What broker will promote these MNI stocks to their clients? Perhaps they are thinking of preferred, but those would have to come at a premium, and at today's price, MNI is offering a 22 percent dividend and finding no buyers. And, finally, if the float fails, the fallout would be even more devastating to MNI than the current miserable situation. The bottom line for me is that this is a truly dumb idea, and indicative of how mismanaged and erratic this company has become. In the midst of all this turmoil, layoffs and buyouts, MNI has been adding vice presidents to an already bloated payroll of do-nothing executives. Like Gannett, which this week sent 100 vice presidents packing, this company needs to take a look at revamping its management, and the quicker it does that, the better.

8:49 AM  
Anonymous Anonymous said...

Stockbroker to client: "Boy, do I have the deal of a century for you. There is this stock that has gone from near $80 to $3 today in the last two years that is making an additional stock offering. The market share of this company is shriking; it is selling to fewer customers; the business plan is shot; it is getting less revenue; and it has a huge new competitor that has no payroll of its own that is rapidly stealing away its business base. But don't worry about that. I think you need to put all of your savings and 401K into this stock. What do you think?"

9:16 AM  
Anonymous Anonymous said...

If your Pruitt buyout plan is correct, my lawsuit is looking even stronger today after someone floated a trial balloon about diluting stockholder equity. As I write this, MNI is down more than 10 percent today and there is only silence from Sacto HQ on this WSJ report. Since Pruitt is a lawyer, I cannot believe he does not see the jeopardy involved in driving the stock even lower while he prepares a buyout. It is for that reason that I think Pruitt's departure was the reason for the trust fund resignations.

9:40 AM  
Anonymous Anonymous said...

I read Pruitt's statement twice, thought about it for a while, and so why do I still believe something is up?

4:06 PM  

Post a Comment

<< Home