Thursday, September 14, 2006

Sale! Sale! The gang’s all here

Given mainstream media’s sudden urge to spin off “non-strategic” assets, you might be tempted to conclude that divestiture is the better part of creating shareholder value.

Maybe it is. And maybe it isn’t. We won’t know for sure until we see how wisely the sellers spend the proceeds.

In but a few of the planned divestitures recently announced, the New York Times Co. is shedding its nine-station TV group; Time Inc. is selling 18 niche magazines; Dow Jones is shopping six Ottaway newspapers, and Disney and CBS respectively are dumping all or some of their radio holdings.

Coincidence? Not a chance.

The media giants, and others including Tribune Co., Lee Enterprises and Journal Register Co., are pruning their holdings to focus, as they say, on their core businesses.

That means the companies get to unload under-performing or difficult-to-manage assets while simultaneously raising a welcome bit of extra cash. In some cases, the companies noted that they are motivated by accumulated tax losses they want to use before they expire. Tax losses offset capital gains, enabling a seller to pocket more of the upside.

The success of these corporate restructurings will turn on how the proceeds are used after the lawyers and investment bankers take their cuts. If the companies invest in the Internet and mobile media to strengthen and defend their franchises, they likely will prove to have made wise strategic decisions. If the media companies do any less, the sell-a-thon may prove to be a fruitless exercise.

Based on the answers to the following questions, you can, in the fullness of time, evaluate the outcome for yourself:

:: Will cash from a divestiture be used to reduce debt and trim borrowing costs?

Owing to historically high profitability and strong, predictable cash flows, most media companies borrow a lot of money to finance acquisitions and build new plant.

With weak advertising sales and higher operating costs cutting into the earnings of the media companies, their continuing ability to repay those loans has been drawing increasing concern from the financial community. When that happens, corporate credit ratings fall and interest costs rise.

If a company repays enough debt, it may qualify for lower interest rates. All things being equal, this should improve earnings and potentially shore up the stock price. But lower interest rates, while desirable, do little to advance anyone’s new-media strategy.

:: Will spin-off proceeds be used to buy back shares in hopes of lifting sagging stock prices?

Confronted with weakening stock prices for the reasons discussed immediately above, several media companies have been avidly buying their own stock in what appears to be a puzzling effort to make their shares seem scarcer.

As covered in Econ 101, scarcity classically increases prices, assuming demand remains at least constant. Unfortuantely, demand for media shares has been so weak lately that stock repurchases, though often applauded by disenchanted institutional investors eager to dump wilted holdings, seldom buoy a stock very meaningfully for very long.

A company that plows the proceeds of a divestiture into buying its own shares is not making any strategic headway. Or much sense.

:: Will money be spent on a special dividend to mollify shareholders?

When management is faced with a significant bloc of restive shareholders, it sometimes attempts to cheer them with a wad of cash in the form of a special dividend. Although none of the above companies to date has discussed this alternative, each would be well advised to avoid this strategically abysmal idea.

* * *

While acknowledging the anxiety suffered by the thousands of employees who suddenly have found their jobs and lives in play, it must be noted that it is perfectly legitimate for a company from time to time to assess the strengths and relative value of its business units.

If the divestitures reflect a rigorous and thoughtful strategy, then management may be congratulated for making the requisite tough calls. If we are witnessing nothing more than a series of cynical tweaks, the misdeeds, if any, will be manifest.