Where extreme cuts may come at papers

Operating in an atmosphere of unprecedented uncertainty and growing dread, publishers are systematically reviewing every aspect of their businesses with an eye to saving a buck any way they can.

They are preparing cascading contingency plans that can be implemented according to the degree that sales might decline. The industry’s revenue crisis is detailed here in the first installment of this series.

Not every contingency prepared by publishers will be implemented. The options eventually selected will be based on the state of the general economy, the health of a particular market and the specific economics of a given newspaper. Here’s a glimpse of what may lie ahead:

The list of potential expense reductions includes squeezing staffing, shuttering bureaus, carving out layers of middle management, telescoping multiple sections of the paper into one, tightening newshole, scrapping syndicated features and wire serevices, axing op-ed pages and book sections and eliminating classified ads on certain days of the week.

In an example of what could become commonplace, the Newark Star-Ledger reduced headcount by almost half in the fall by threatening to close the paper by the end of the year if its cost-cutting targets were not met. The reduction was enabled through enriched severance benefits and concessions from labor unions throughout the plant.

Another alternative will be to ask employees to accept voluntary pay cuts, to agree to work longer hours, and to ease manning requirements and other work rules. Bonuses may be reduced or eliminated for the fortunate few who still would have qualified for them.

Publishers will outsource anything that makes sense, including ad sales, ad composition, copyediting, page layout, printing, customer service, fleet maintenance and delivery.

Many newspapers will look to selling their historic downtown edifices to raise operating capital and repay debt. If they can’t outsource printing, they will move their presses to the warehouse district of town and relocate the administrative, ad and editorial staffs to rental space in class-B locations.

Continuing a trend that began this year, publishers will be seeking to partner with neighboring papers to save costs on ad sales, content generation, printing and delivery.

If the economy deteriorates too far too fast, partnerships of convenience may give way to outright mergers in markets shared by multiple newspapers.

This would be especially likely in cities where one or both of the properties is financially distressed, enabling the publishers to argue that the traditional antitrust objections to such transactions should be waived in the interests of preserving the editorial voice of at least one surviving publication. To make a merger more palatable to regulatrs, the publishers might agree for a while to have the surviving paper continue printing some features carried over from the one that does out of business.

Likely merger candidates would include the papers in Minneapolis-St. Paul, where the Star Tribune and MediaNews Group face heavy debt obligations, and northern California, where MediaNews is struggling and the San Francisco Chronicle could lose up to $100 million despite a series of stringent budget cuts. The combinations in both markets may be driven by Hearst Corp., which is not only a major investor in Media News but also owns the Chronicle.

Other places where potential mergers might occur are south Florida, where the Palm Beach Post, Miami Herald and Sun Sentinel are suffering in one of the most toxic real estate markets in the land, and Southern California, where the San Diego Union is up for sale, and plunging revenues and profitability are causing havoc at the Los Angeles Times, Orange County Register, Riverside Press Enterprise and the far-flung portfolio of MediaNews properties.

While the Chicago Tribune and the Sun-Times Media Group each would be healthier if it were the sole surviving publisher in Chicago, it is not clear how either company could afford to buy the other. With the situation the same between the Globe and the Herald in Boston, the publishers in both cities seem to be locked into indefinite wars of attrition.

If things get bad enough, joint-operating agreements might be terminated in places like Denver, Detroit and Seattle. When government-sanctioned JOAs were terminated in the past, the surviving newspaper agreed to pay the departing publisher an annuity for an extended period of time. As the successor interest to Knight Ridder, cash-strapped McClatchy, for example, is on the hook to pay Cox until 2021 for its willingness to the close of the Miami News in 1998. Future JOA buyouts may not be so generous.

Things could get particularly dicey for individual, free-standing publishing companies like the Star Tribune, Boston Herald and Philadelphia Media Holdings, the latter of which may find it increasingly difficult to sustain the publication of both the Inquirer and Daily News.

Even though this is the worst time in history to be selling or financing a newspaper company, several operators, including Copley, Cox and Journal Register, have put publications on the block. Journal Register, which was among the first of the many precariously financed publishers to default on its debt, has stated that it will close papers it cannot sell.

Companies like GateHouse Media, Lee Enterprises, McClatchy, MediaNews, Morris, New York Times Co., Philadelphia Media, Star Tribune and Tribune are obligated to improve their profitability in the coming years to repay the principal and interest on money they have borrowed to make acquisitions.

In the event the publishers are unable to meet those obligations, their creditors will move in to slash expenses; attempt to sell off assets to generate cash, and take every other step necessary to sustain the properties as going concerns.

This will last as long as the newspapers continue to generate operating profits. But it is highly unlikely in this environment that any creditor would provide additional cash to prop up a money-losing newspaper.

In other words, a newspaper that cannot sell enough advertising or cut enough expenses to sustain profitable operations is not likley to make it to the other side of 2009.