Sunday, April 08, 2007

Why NYT may have to go private

To comfortably maintain control of the New York Times Co., the Ochs-Sulzberger family may have no alternative but to follow the Tribune Co. in a highly leveraged transaction to remove their company from public ownership.

Based on the economics of the pending Tribune deal and the insatiable appetite of junk-bond investors willing to finance aggressively leveraged transactions, NYT Co. could take itself private by increasing its $1.5 billion debt load by up to three times.

In that event, as discussed previously here, the transaction might well require sharp reductions in the abundant staff, bureaus, travel budgets and other resources that make the New York Times the newspaper of record for the world’s largest and most powerful democracy.

The family may have no choice about taking the company private, owing to the escalating pressure from dissatisfied public shareholders to abandon the two-tier stock structure that gives the clan effective control over a company whose operating profits of 16.3% in the last 12 months seriously trail the industry average of 23.5% (see graph below).

Two major groups of public shareholders are asking fellow investors to withhold their votes for the management slate of directors at the annual meeting on April 24. The two-tier stock structure gives the family 9 of the 13 board votes – and thus effective control of the business until such time as the structure is modified. So, the company is in no immediate danger of a change of control.

(UPDATED: See additional discussion in Comments section below.) However, the disenchanted investors have the means to intensify pressure on the family to either (i) give public shareholders more control over the business, (ii) sell the company or (iii) follow Tribune’s lead by buying out the public holders to take the company private.

Unless the family wants to exit the newspaper business (and there is no sign of that), then private ownership would seem to be the most appealing of the three alternatives.

The NYT Co. could purchase its outstanding public shares for about $4 billion, assuming a 20% premium over the stock’s current value of $23.42 a share. The family could finance the purchase by taking on more debt, selling assets and/or raising cash from a compatible investor willing to hold a minority stake in the business.

Given the generous tax benefits associated with an employee stock ownership plan, the family might elect to take a page from the Tribune deal by adding an ESOP to its going-private plan. But the same end could be achieved without one, too.

If the $4 billion required to buy the stock were added to NYT’s existing debt of $1.5 billion, the resulting debt burden would be a prohibitively high 11 times the company’s operating profits of $511 million in the last 12 months. By contrast, the contemplated financing for Tribune, which would make it one of the most leveraged media companies in the land, is 9.2x its trailing earnings before interest, taxes, depreciation and amortization.

But NYT’s debt would be reduced to 9.8x earnings at the conclusion of the pending sale of its television group for $575 million. The company’s leverage could – and probably would – be cut to a more manageable level by selling some or all of such assets as:

:: The ailing Boston Globe and its associated properties, whose value in my estimation is about $650 million.

:: The International Herald Tribune (estimated value: $150 million).

:: The company’s 58% stake in its glitzy new Times Square office tower (estimated value: $500 million)

:: Elements of its regional newspaper group (estimated value of the entire group: $900 million).

NYT bought About.Com for $410 million in 2005 but is unlikely to part with its largest new-media franchise.

The more properties the company sells, the more it could reduce its debt and the less it would be forced to cut operating expenses at the New York Times. Thus, the future of the crown jewel of American journalism may well depend on how many other jewels the family is willing to sell.

Reactions to this post

Don't Be Betting That NYT Will Take Itself Private
by Jon Fine, Business Week

The New York Times, Still in Play by Mark Potts, Recovering Journalist

Times Won't Change Hands: Adviser by Robert MacMillan, Reuters


Anonymous Anonymous said...

Another perfectly acceptable option for NYT is to do nothing. Sure, the dissident public shareholders won't be happy with that. But that's one of the risks they knowingly took on when they purchased shares in a company controlled by a family trust.

7:36 PM  
Anonymous Anonymous said...

Um. you're going to have to flesh this part out a bit before this post can be taken seriously:

"the disenchanted investors have the legal and other means to intensify pressure on the family to either"

Which legal and "other" means are you referring to, exactly. And why do you assume (which you tacitly do) that NYT has to bow to them?

For the rest of this post to be worth reading, you have to back you back up that major assertion, which you made in kind of an offhand fashion, considering the nobody else seems to have made it.

8:15 AM  
Blogger Hank Scott said...

I agree. There's no evidence that disgruntled shareholders have a legal case. After all, they bought the stock knowing there was a dual share structure. Hassan Elmassry would have a hard time, I think, convincing a court that he didn't know what he was doing. The dual share structure is why Times stock has been cheap relative to similar companies without such a structure. So shareholders can't expect to have their cake (a lower stock price) and eat it to (press for elimination of the dual structure).

9:24 AM  
Anonymous Anonymous said...

If NYT is committed to owning The Globe, perhaps they could instead sell their equity in the Boston Red Sox and New England Sports Network.

A lot of this is ego; decisions such as the purchase of The Globe and the takeover of the WashPost's share of the International Herald Tribune had little to do with good business and much to do with building an elite brand.

11:09 AM  
Blogger Newsosaur said...

In response to the questions above about what sort of pressures could be brought on NYT Co. to modify the ownership structure, the first of them already have materialized.

They include withholding votes for the board slate last year and a recent formal presentation of grievances to the board by dissident investors.

Although there are some theories about potential causes of legal action that could force management's hand, most experts give them scant likelihood of success. Thus, I have modified the post to remove the idea that "legal" action could prod the company to make changes in its ownership. I apologize for raising the issue without vetting it more fully.

While circumstances were different at both Knight Ridder and Tribune Co., suffice to say that sustained shareholder pressure certainly forced the ownership changes we have witnessed at both companies.

3:10 PM  
Anonymous Anonymous said...

"While circumstances were different at both Knight Ridder and Tribune Co..."

Unfortunately for your thesis, those different "circumstances" are crucial. The NYT's dual-class stock structure is something that it has that neither Knight Ridder or Tribune did. And that dual-class structure was put in place at least in part for this precise purpose: to insulate the Time's journalistic enterprise from the whims of Wall Street.

Yes, shareholders can try to use public pressure to try to convince the Time's board to look into a sale or other options. But thanks to the dual-class structure, that pressure is likely to be far less effective than it was with KR or Tribune.

For both of those companies, there was a real worry that if the board didn't respond to shareholder demands, disaffected shareholders could band together and either oust the board or force it to take the steps they wanted.

The dual-class structure pretty much prevents that from happening at the NYT. As long as the board has the confidence of the Sulzberger family, it has little to no obligation to bow to the demands of other shareholders, no matter how loudly they try to make their case in the press or elsewhere.

lead a proxy fight

4:22 PM  
Anonymous Anonymous said...

Perhaps I'm missing something, but didn't the two-class stock structure exist when these disaffected investors bought into NYT?

So let me get this straight. They knowingly buy into a company with two classes of stock, and when their investment goes south they don't blame their own faulty judgment. Instead, they blame the two-class stock structure that was designed for the sole purpose of protecting the newspaper's managing owners from Wall Street's notoriously short-sighted pressure.

So where, exactly, do these unhappy investors get the idea that they can change the rules in the middle of the game? Just because an investment loses value doesn't mean that the rules for that investment should forever be changed. What chutzpah.

9:23 AM  
Anonymous Anonymous said...

Some commenters express a naivete about the ways of a public company. Yes, the NYT public shareholders do not have voting control. But as the stock price continues to sink, shareholders express continued votes of no confidence in the board and the public continues to hammer on the Sulzbergers, they WILL have to do something. They will not just ride this thing down the toilet. At some point, directors will start to press the Sulzbergers or quit - with the heightened level of liability for public directors these days, who would want to stay to provide cover to Pinch while the market is trying to throw them out. They all still have fiduciary duties to the public holders. The two tier voting structure makes it hard to effect change, but there are many other avenues to apply pressure.

2:39 PM  
Anonymous Anonymous said...

The family has no intention of taking the company private or giving into any Class A shareholder pressure. The Sulzbergers, employees and current and former management own over 25% of the Class A shares outstanding. There is no way the numbers will add up even if ALL the institutional shareholders withheld their vote for the Class A directors.

Taking the company private was explored and rejected by the family trustees. There is no point in saddling the Company with unsustainable levels of debt or having the family trust beholden to pay off the interest to some hedge fund. It would threaten the company's ability to fund future investments and, most importantly, pay the dividends the family relies on for their income.

A sale of the New England Group, including the sports interest, is very likely, but the Regional Group is very profitable.

4:53 PM  

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