Can Tribune Co. survive bankruptcy?

The good news is that today’s bankruptcy filing won’t make things much worse for the Tribune Co. The bad news is that the filing won’t improve things, either.

While bankruptcy protection in an ideal case enables a struggling company to restructure its debt, streamline its business and put itself on a sounder footing for the future, it’s hard to imagine how the newly unburdened Tribune Co. can improve its long-term prospects in the most toxic environment in history for newspapers.

In filing for bankruptcy in a federal court in Delaware, Tribune has erected a firewall between itself and the creditors who are owed some $12 billion. The company took the step because “we have too much debt in light of [a] dramatic and unexpected decline in revenues, which has been amplified by the current recession,” according to a statement posted in a QandA at its new bankruptcy information website.

Now that Tribune is under court supervision, it not only will be protected from its creditors but also will have the right to walk away from unnecessary leases on real estate, equipment and vehicles. It will be permitted to renegotiate bills owed to vendors of everything from newsprint to paperclips, likely enabling debts to be settled for cents on the dollar.

Wages, benefits and other obligations to employees usually are unaffected by a bankruptcy filing, but union contracts in some cases can be altered or abrogated.

Many employees who took buyouts in the last year got lump-sum payments but some people who were discharged more recently may be affected by the company's decision to discontinue pending severance payments, deferred compensation and certain other payments to former employees.

Outstanding payments to former employees will be subject to "later proceedings before the court," according to an internal statement quoted by LA Observed. Among those payments are some multmillion-dollar packages owed to former Times Mirror executives.

Bankruptcy typically wipes out the equity investors in a business. In this case, that would include Sam Zell, who ponied up $315 million to gain control of a company valued at $13.5 billion when he took it private a mere 353 days ago.

But the equity wipeout also may include the amount invested on behalf of the “about 20,000” employees who are members of the Employee Stock Ownership Plan that Zell created to enhance the tax efficiency of the transaction that netted him a company for which no other credible buyer emerged. Most of the retirement funds of Tribune employees are not invested in the ESOP, because the plan has been in existence for barely a year.

Tribune promises to take advantage of bankruptcy protection “to use our great brands and the enormous talent of our people to create a fresh, entrepreneurial company that rewards innovation and creates sustainable, relevant information products for our customers and communities.”

That sounds great. But there has been no evidence over the last year that Zell or the shock jocks he dispatched to run the company have any ideas about how to arrest the long-running decline in newspaper advertising that – significantly – predated their ownership. The decline has accelerated this year in the worst recession since the 1930s.

Fixing the Tribune would be a tall order for any management team, but it already has proven to be well beyond the capabilities of the incumbents. Far from effectively using Tribune’s brands, market power and talented staff, the Zellistas have terrorized the company through successive layoffs and pointless vindictive tirades.

The question now is whether the floggings will continue or whether the company – unshackled from an unconscionable debt load that bankers never should have sanctioned – will be truly free to try to invest in the innovative niche print, online and mobile products that could save its wasting franchises.

Or, will the Zellistas continue to strip-mine Tribune Co. until there is nothing left but the squeal?

The LAT and U-T merger: Double trouble?

The pending purchase of the San Diego U-T by the Los Angeles Times represents a synergy not of strength but of tsoris.  

Tsoris, for the uninitiated, is the Yiddish word for trouble. And woe – unlike readership and revenues – has been plentiful at both of these newspapers in the last decade.  

As illustrated in the graphic below, the upcoming merger combines a faltering pair of former publishing powerlifters whose businesses are sagging as much today as the pecs of Arnold Schwarzenegger, the only governor in the history of California unable to correctly pronounce the name of the state (video). Here are the sobering metrics for the SoCal publishers:

Both newspapers lost more than half of their weekday print circulation between 2004 and 2014, dropping their respective market penetrations to 15.6% of the households in Los Angeles County and 17.8% of the homes in San Diego County. Circulation data comes from the Alliance for Audited Media, an industry-funded group. 

In the same period, Sunday print circulation – which typically delivers half of the revenue and more than half of the profits at a newspaper – fell by 48.1% in Los Angeles and 45.6% in San Diego. 

While the financial performance of the two publications is not publicly available, it is possible to gauge the general health of the newspaper business by comparing the 10-year financial performance of Tribune Publishing Co., the parent of the LAT, with the publishing division of its predecessor company.  

The annual reports issued by the companies show that Tribune publishing revenues tumbled by 58.5% to $1.7 billion in 2014 from $4.1 billion in 2004.  In the same period, earnings before interest, taxes, depreciation and amortization (EBITDA) fell 63.6% to $260 million in 2014 from $730 million in 2004.

It must be emphasized that Tribune’s holdings were not identical over the 10 years, so this is not a strict apples-to-apples comparison.  The predecessor company, which was roiled by the Zellistsas and an epic bankruptcy before it jettisoned its newspapers, divested Newsday in 2008. The new standalone publishing spinoff has started making fill-in acquisitions in the Baltimore and Chicago markets. 

Notwithstanding the imprecision of the available financial data, it is fair to conclude that both of the once enviable SoCal publishing franchises have seen better days. Hence, the question: “Why would anyone want to put these two struggling companies together?” Here’s a plausible answer: 

Tribune announced last week that it will pay $85 million to buy the U-T with an eye to consolidating operations as much as possible between the two newspapers. Normally, this means moving to a single production facility, a single administrative infrastructure, a combined advertising staff and a streamlined newsroom that can share content across the various titles.   

In other words, Tribune instantly can cut expenses by cutting staff in a way that is not readily visible to readers and advertisers.  At the same time, there theoretically is a chance to boost revenue for the consolidated operation because the ad staff efficiently can offer both wider and more targeted regional coverage. 

Interestingly, the San Diego purchase could turn out to be only the first step in a multi-phase plan to consolidate all the major dailies from the Tehachapi Mountains at the north end of the Los Angeles basin to the Mexican border.  

After struggling under the erratic management of Aaron Kushner, it is entirely possible the Orange Country Register soon could be up for sale.  If LAT bought the Register, it would own the only major paper separating it from San Diego. 

In the meantime, a group of smaller dailies in markets like Long Beach, Van Nuys and Whittier are immediately up for grabs as part of the auction of Digital First Media, a coast-to-coast publishing company that is being dumped by the disenchanted private investors who own it.  
While bigger may be better in many things in life, this seldom is the case when it comes to compounding woes. And that’s what the LAT is doing in buying the U-T. 

Even when two businesses are humming along smoothly, a merger takes months – if not years – to complete.  A merger profoundly distracts the managers and employees in both companies, taking their eyes off the ball of their day-to-day jobs because each is wondering whether she will survive the inevitable game of musical chairs.

The challenge is compounded when the business is troubled, because the mechanics of the merger necessarily have to take a back seat to the immediate problem of shoring up sales and meeting demanding profit targets.  This is all happening, remember, amid recurring rounds of musical chairs. 

The challenge is most formidable of all when the reason the business is weak is because there is shrinking demand for your product in the marketplace. And this is precisely the problem that every newspaper faces. 

Without question, an ever-growing number of readers are shifting their attention to the digital media and an ever-growing number of brands are shifting their advertising budgets to pursue them.  That’s why newspaper circulation, sales and profits have dived precipitously in the last decade.  

A roll-up strategy would make sense if Tribune had a plan to pivot its troubled newspapers to viable business models that would flourish in the digital era. But no such plan is evident.  

While the digital traffic reported by the LAT and U-T in the accompanying table looks impressively large, a quick check of census data raises questions. The 35 million unique monthly visitors claimed by the LAT is fully three times greater than the population of its home county. That is a hefty number, even if you credit the paper with a certain degree of national and global appeal.  Similarly, the 3.4 million uniques reported at the U-T suggest that everyone in the county visits its digital sites at least once a month. That would be nice, if true.  

The nose-counting problem is common throughout the entire digital publishing industry and newspaper companies can’t be blamed for the limitations of the technology. But it’s important to keep these vagaries in perspective.    

There is no doubt, however, that Tribune, whose eroding top-line revenues faltered another 5.7% as recently as the first three months of this year, is underperforming its peers when it comes to digital revenue production. 

While the U.S. newspaper industry in 2013 generated an average of 16.5% of its ad revenues through the sale of digital advertising, digital media produced only 12% of Tribune’s sales in the first quarter of this year.  The industry-wide figure for 2013 is the latest information available from the Newspaper Association of America.  The Tribune’s performance is called out in its quarterly earnings statement, where the company promises little more than to do a better job of selling ads.  

So, there you have it: Falling readership, tumbling sales, shrinking profits and a questionable digital strategy.  It makes you wonder why Tribune wants to double its troubles.