How debt did in America’s newspapers
That’s right: $13.5 million. Thus, the stock in this once well regarded company has dropped by more than 99% in 3½ years, vaporizing more than $1.5 billion in value as investors fled in fear the company would default on its debt and render their shares worthless.
Lee is but one example of what happened to many publishers who borrowed too much money to fund ambitious acquisitions between 2005 and 2007, taking advantage of the then-juicy profitability of newspapers and the once-easy access to abundant, relatively cheap debt.
Had the newspaper industry continued to thrive in the last three years in the way it had for the decades since World War II, the executives who engineered these transactions would look like heroes today. But that’s not how things worked out.
Shareholders, lenders, readers, employees, former employees and soon-to-be-former employees are paying the price for acquisition strategies that loaded several publishing companies with debt they cannot handle today because industry sales have dropped by 25% since 2005 and profits have dried up despite desperate efforts to throttle expenses.
The first major newspaper bankruptcy already has occurred. Less than a year after it was taken private by Sam Zell, the Tribune Co. filed for protection from creditors owed a staggering $12 billion. Stock in the company, whose shares were worth $8.2 billion when Zell bought it 366 days ago, is worth nothing today.
Beyond Lee and Tribune, publishers struggling with too much debt include Journal Register Co., GateHouse Media, McClatchy, MediaNews Group, Minneapolis Star Tribune, Morris, New York Times Co. and Philadelphia Media Holdings. The details in each case may be different. But the story is the same.
Long one of the most rigorously managed companies in the industry, Lee today is struggling to avoid default on $1.4 billion in debt, the unpaid remainder of the money it borrowed to finance the acquisition of the St. Louis Post-Dispatch and 13 other papers in 2005.
The company also is in danger of becoming the fourth newspaper publisher this year to be booted off the New York Stock Exchange because the price of its shares has fallen below the required minimum.
Lee’s shares closed Friday at 30 cents apiece, far below the $1 minimum required for continued listing on the Big Board. The stock has been trading below the minimum for about half a month. If the price fails to reach $1 for 30 days in a row, the stock will be banished to the Pink Sheets, where it will join GateHouse, Journal Register and the Sun-Times Media Group, whose shares closed Friday respectively at 5 cents, 0.4 cents (that was not a typo) and 4.5 cents.
This is a vastly different outcome than anyone expected when Mary E. Junck, the chief executive of Lee, proudly announced that she had bought Pulitzer in January, 2005.
Noting that the acquisition would more than double the sales of her prospering company, she said “the acquisition of Pulitzer allows us to take an exciting and logical next step into another exceptionally attractive group of markets.”
Although this purchase took Lee’s debt higher than it ever had been, Mary said she was “confident that the combined cash flow of the business will enable us to return quickly to an investment- grade profile,” adding that this deal is “exactly the kind where we excel as an industry leader in building revenue and circulation.”
For a short while, the acquisition worked as planned. Newspaper advertising revenues hit an all-time industry high of $49.4 billion in 2005, but began a slow slide in April of the following year that since has turned to an absolute avalanche. Ad sales are on track this year to come in at $38 billion or less, representing a 25% decline from where they stood in 2005.
Twenty-five percent is a magic number for most newspapers, because it is pretty close to the industry’s traditional average operating profit. Newspapers and their lenders were counting on margins of that magnitude, or better, to repay their hefty borrowings.
As sales began decaying, papers tried to cut expenses fast enough to preserve their profits. But the accelerating sales decline – and uncontrollably accelerating expenses in areas like newsprint, fuel and employee benefits – has overwhelmed even the most draconian cost cutting, severely curtailing profits. Lower profits mean that newspapers are not generating the money they need to repay their loans.
Today, companies like Lee either are out of compliance with the terms of their loans – or close to defaulting on them.
In some cases, the papers literally do not have enough cash to pay the sums they owe. In other cases, the publishers are failing to comply with the myriad technical conditions in their loans that prescribe things like a minimum stock value or certain ratios of profitability to debt. A default on these so-called technical terms can trigger sanctions as severe as the failure to make a timely payment on a loan.
In Lee’s case, the falling value of its stock – occasioned by mounting investor concerns that it would default on its debt – forced the company earlier this year to declare as a loss about half of the $1.46 billion it spent to acquire Pulitzer.
Last week, the company said the same accounting rules that forced the first writeoff will require it to declare a loss on at least another $180 million of the value of the Pulitzer deal. In that event, Lee will have been forced to write off some $900 million, or 62%, of the money it spent on Pulitzer. The final figures are being calculated and likely will be announced by the end of the year.
Even though Lee generated $211 million in operating profits on sales of a bit more than $1 billion in the last 12 months, the company said the plunge in the value of its stock is likely to put it out of compliance in the spring with the requirement in a $306 million note that the company maintain a mininmum net worth higher than it is today.
Lee is hoping to persuade creditors to relax the net-worth provision of the note. If the company fails to do so, a default of that note automatically would trigger breaches of some of the company's other debt, too.
The severity of the situation is underscored by a warning from Lee’s auditors that they may have to add a statement to the company’s annual report questioning its “ability to continue as a going concern.”
In plain langauge, that means auditors are worried that the Lee's debt load threatens its ability to remain a healthy and sustainable business.
And remember, Lee is not alone. It is but one of several publishers who are, more or less, in the same wobbly boat.