Monday, March 17, 2008

Sidelined at the Big Board

The continuing meltdown of newspaper stocks and bond ratings has provoked emails and calls from readers seeking a deeper understanding of the financial pressures facing publishers. In the first of two posts (second is here), these are answers to the most common questions.

Q. Trading of Journal Register Co. (JRC, which closed Friday at $0.79) and the Sun-Times Media Group (SVN, $0.82) has been halted at the New York Stock Exchange because the price of their shares is below the minimum required by the exchange. What does this mean? What happens to the companies?

A. A stock is not permitted to trade on the floor of the Big Board if it falls below $1.05 a share, a threshold that both JRC and SVN crossed last month. This was a big deal in the days that all buy and sell orders were matched by human beings on the trading floor of the NYSE, but it doesn’t matter as much today, because the shares continue to trade on several computerized systems that do the same thing.

Although the NYSE has halted floor trading for JRC and SVN, anyone can buy and sell these shares through any broker. Stock quotes are available at MarketWatch, Yahoo Finance and all the usual places. Floor trading in a stock can resume at the Big Board if it trades above $1.10 a share for a full day, but a stumble below $1.05 for even a minute will put the issue back in the penalty box.

Disclosures: I own shares of JRC that I bought for well over $1 and have worked as a consultant for SVN.

Q. Do deteriorating stock prices mean a company is headed for bankruptcy?

A. No. A company’s stock price is an indicator of the collective investor sentiment about the future value of a business, which nowadays is influenced by the plummet of newspaper revenues and circulation over the last three-plus years. But a company is not bankrupt unless its liabilities outweigh its assets. A low share price is not necessarily a precursor of bankruptcy.

Regardless of its stock price, a company can continue to operate as long as it takes in more money than it spends. It even can weather losses for a period of time, if it has adequate cash reserves to continue paying its bills during the period it is not making a profit. But no business can remain a going concern forever, if rising costs and/or falling revenues prevent it from making a profit.

To be clear: Most newspapers continue to make healthy profits, as compared with many other industries. But investors, as discussed more fully below, are distressed that the profits of most publishers are not as high, or as predictable, as they used to be. Further, as discussed more fully in the next installment of this series, many newspapers have borrowed substantial sums of money that require them to not only sustain, but increase, their profit margins in a challenging time of industry contraction.

Q. Will SVN or JRC be acquired by strategic buyers with properties nearby?

SVN earlier this year retained an investment banker to explore the sale of the company, which is a collection of five operating groups that collectively publish more than 80 titles in Chicago and its suburbs. The process of potentially selling some or all of the assets was under way before the price of its stock dropped below $1.05.

Individually or as a whole, SVN’s assets could be of interest to community-newspaper publishers like GateHouse and/or wealthy local citizens who want to ensure the ongoing publication of the flagship Chicago Sun-Times, the No. 2 daily in the metropolitan area behind the Chicago Tribune. Some people have speculated that the Sun-Times might wind up being acquired by, or entering into a partnership with, the Tribune. In a cost-saving move, Tribune trucks already have taken over delivery of the Sun-Times.

JRC operates newspapers in six clusters. It would be possible to break up the company by selling some or all of the assets to neighboring publishers, who could add the titles to their existing operations while saving the costs of independent advertising staffs, production facilities and so forth. As but one example, JRC’s largest cluster, which surrounds Philadelphia, could be of interest to Gannett, Advance Publications or the local investor group that owns the Philadelphia Inquirer and Daily News.

The liquidation of JRC likely would come at quite a loss. The company paid $415 million in 2004 for a cluster of daily and weekly papers in Michigan, where the sagging economy has depressed the sales and profitability of the properties. If JRC could find a buyer willing to purchase a cluster of troubled newspapers serving several struggling Detroit communities, it is difficult to imagine how the papers would be even worth half of what the company paid for them less than four years ago.

Q. Given the negative investor sentiment regarding the industry, who would want to buy a newspaper-publishing company?

That’s the $64 question. The stock of McClatchy (MNI, $9.06), which undertook by far the biggest and highest-profile newspaper acquisition in recent history, has dropped some 80% since it agreed to buy Knight Ridder in 2006. Last year, MNI wrote off $2.8 billion of the $4 billion it spent on the acquisition, owing to the depressed value of its own stock and the underlying assets. (For a fuller explanation of this complicated accounting exercise, see this earlier post, where I was directionally accurate, as they say, but underestimated the magnitude of the eventual writedown.)

MNI is not alone in being required by accounting rules to write down the value of its acquisition. Others forced to take similar steps include the New York Times Co., Belo and GateHouse, another ambitiously acquisitive publishing company whose shares have fallen nearly 72% to $6.26 since its initial public offering in November, 2006.

Disclosure: I own shares of MNI, which I bought at considerably more than $8.95 apiece.

Q. Why are investors so down on newspapers, anyway?

A publisher brave enough in the current environment to try to add additional newspapers to her or his portfolio not only would run the risk of a negative reaction from public investors, but also would find the idea a tough sell among the private equity investors and lenders who enthusiastically supported such transactions as recently as four or five years ago. There are several reasons for this:

First, newspaper sales and profits, which had been wondrously predictable from year to year as recently as 2000, are anything but today. The only thing investors abhor more than uncertainty is a steady procession of quarterly declines in sales and profits with no discernible end in sight. And that’s what they have been seeing since the beginning of 2005.

Second, the financial community has become increasingly skeptical about the ability of newspaper managers to adapt their business models fast enough to the technological, demographic and economic forces that have battered the industry since the start of 2005.

Third, there is far less money to invest and lend in the current, credit-constrained economy.

Last but not least, most investors and lenders are not convinced – even with some stocks trading at well under $1 share – that newspaper values have hit bottom. Except for a few well-heeled contrarians like Rupert Murdoch, Sam Zell and the activists who have purchased respectively 19% of NYT and 21% of Media General, most investors will steer clear of newspapers until they see a sustained rebound in public stock prices and the value of newspapers in private merger transactions.

The fact that a few hardy investors are zeroing on newspapers suggests that they think a bottom could be near.

Q. When will newspaper values recover?

That’s the $64,000 question. The short answer is that newspaper values will recover when publishers show they once again are capable of producing consistent and predictable gains in sales and profits.

This will require (i) the creativity, skill and discipline to undertake a rapid, top-to-bottom overhaul of an outmoded and broken business model, (ii) an improvement in the overall economy and (iii) a heaping helping of luck.

Next: Hefty debt, sagging bond ratings


Blogger Mary Specht said...

Thanks, this is helpful to those of us on the product/content side looking to figure out the business stuff. Eager to read part II.

4:26 PM  
Anonymous Anonymous said...

You might want to impose a limit of one $64 question per day.

7:51 PM  
Anonymous Anonymous said...

Very helpful post. Thank you.

Hello, Woodpecker. I'm back at Reuters.


5:05 AM  
Blogger Anne D. said...

Thank you. This has been very helpful and easy to understand.
I have been with the paper I am at for going on 21 years. We were bought out twice, this second time by JRC. It is truly sad to us, the people who love working in newspapers, being a part of the community in that sense, to see it go down hill so bad. It will take some extremely creative thinkers to bring thigs back. You are not only up against the sagging economy, but a lack of interest in print media by young consumers. So much is available on the internet now. But I still believe print media can rebound. Maybe it is my age, but I still love being able to sit down and hold a newspaper or magazine in my hand and read it, not stare at a computer screen to do it. But I love computers too. We are also up against not being able to keep up with the latest version of software that we need, slowing becoming un-compatible with even some of our OWN parent companies. We are at least 4 version behind on everything we use, some maybe 5. The local high school is more up to date than we are. Instead buying more clusters, they should have put their money in to what they already had, and tried to keep some of the many good people way down on the production end of things that we once had. Putting the cart before the horse OH YES,
save a PENNY, spend a NICKLE, DEFFINATELY, that is the JRC way.
If we go under, what will our severence pay be, hahaha, a big bunch of nothing. I do wish everyone well. And I do hope Jelenic is improving health wise, all my best that he overcomes that.

5:41 PM  

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