MNI halts dividend amid default fears
MNI cut its dividend in half in September, but even the reduced 9-cents-per-share quarterly payout apparently is more than the company can afford in the face of increasingly steep debt hurdles in the most dire economy in years.
The scrapping of the dividend, along with the 93% dive in MNI’s stock in the last 12 months, are the sorts of things that ordinarily would put a company in play – or perhaps inspire a bid by the controlling family to take it private.
But the dearth of interest in newspaper acquisitions – and the difficulty almost anyone would encounter in refinancing $2.1 billion in debt in this environment – suggests that the company in the near term will stay the course it has been on: chopping expenses and hoping for an uptick in sales in order to generate enough cash to satisfy its lenders.
Noting that McClatchy in the fall of 2008 negotiated generous – and costly – concessions to the terms of its $2.1 billion in debt, securities analyst Alexia S. Quadrani of J.P. Morgan Securities said last week that she believes the company “still faces a threat of default” in “the back half of 2009, if trends remain weak and absent further credit amendments or successful asset sales.”
As is customary in most financings, McClatchy later this year must pass various tests that compare the level of its cash flow to the size of its debt. Failure to meet the prescribed ratios would constitute a default of the terms of the loans, triggering a number of potential consequences. In the some cases, the company could be forced to seek protection from its creditors in bankruptcy court. That is what happened recently to the Tribune Co. and the Minneapolis Star Tribune.
A “telling sign” of MNI’s distress, said Quadrani in her recent report, “is its reported efforts to sell one of its flagship newspapers, the Miami Herald, in a market in which interested buyers are scarce and industry assets come up for sale seemingly every day.”
In November of last year, analyst Tom Corbett at Morningstar said MNI’s stock “could be worthless,” telling Editor and Publisher: “We think the combination of McClatchy’s exposure to the decline in print ad revenue, high fixed costs, and substantial debt burden, is such that the firm will eventually have to be managed to satisfy its obligations to its creditors at the expense of its equity shareholders.”
The upcoming dividend cancellation certainly qualifies as an event that will come at the expense of stockholders. And the largest group of affected shareholders is the members of the founding McClatchy family, who control 41% of MNI’s stock.
The elimination of their dividends may cause them to take a closer look at the management of the company by Gary Pruitt, the chief executive who engineered the $6.5 billion acquisition of Knight Ridder in 2006 that saddled MNI with much of the debt that now clouds its future. MNI subsequently was forced by accounting rules to declare approximately half of the value of the Knight Ridder deal as a loss.
After serving for years on the four-person board that manages the family stock holdings, Pruitt quietly resigned from the family board in September, citing a conflict between his role as CEO and a director of the trusts.
With Pruitt no longer attending the trust meetings as the dividends dry up, who knows where the conversation might go?