Wednesday, July 16, 2008

‘Private’ time for GCI, LEE, MNI and NYT?

The shares of Gannett, Lee Enterprises, McClatchy and New York Times Co. have fallen so low that the companies have become candidates for transactions that could convert them to private ownership.

The companies could do it themselves, do it in partnership with private-equity funds — or potentially face unwanted takeovers from investors attracted by the bargain prices of their stock.

A public company taking itself private almost surely would face suits from shareholders angry about the monumental trading losses suffered in the last few years. Shareholders could argue that the companies were being sold too cheaply because management had been misfeasant – or worse.

But the ability to escape the pummeling of the public market – and focus wholeheartedly on rescuing their troubled businesses – could encourage the brass at Gannett and Lee and the families at McClatchy and NYT Co. to look into going private.

While these four companies theoretically could go private on their own, they might welcome cash infusions from compatible private investors to fund the strategic initiatives that newspapers ought to be making to salvage their relevance, readership and revenues before it’s too late.

But, as my buddy Mark Potts noted here, the historic selloff of newspaper stocks also makes them vulnerable to unwanted overtures from daring investors seeking to buy the companies at historic low prices in the hope of turning them around.

Although newspaper stocks have been beaten to smithereens, not all companies are candidates for either a going-private transaction or even an unwanted takeover. One key to determining a company’s likelihood of going private – or being targeted by a raider – is the amount of debt it has in relation to its operating earnings.

If a company’s current obligations are light, there may be room to borrow the money necessary to buy its stock back from public shareholders. If the company has fully utilized its borrowing capacity, it most likely wouldn’t be able to get enough money to purchase its shares.

The easiest way to measure a company’s borrowing power is by dividing its current debt by its operating earnings, which also is known as EBITDA (earnings before interest, taxes, depreciation and amortization). Here’s an example of how it works:

In the case of Gannett, its debt of roughly $4 billion is two times the $2 billion in EBITDA that it generated in the last 12 months. To buy its outstanding public stock at a 20% premium over its current price, the company would have to borrow another $4.5 billion, bringing its total debt to about 4.3x earnings. By abolishing its dividend payment, a common practice in a going-privtae transaction, the company would add another $366 million to its EBITDA to bring the so-called leverage ratio down to an even more conservative 3.6x.

A little more than a year ago, lenders were willing to give Sam Zell more than 9x EBITDA to buy the Tribune Co. But the upper limit today for this sort of deal probably is no more than 6x earnings – and maybe less.

In assessing the prospects of going-private transactions occurring among the various publishers, I am assuming any deal requiring more than 6x earnings will not fly. Beyond Gannett, here’s how the others stack up:

Lee Enterprises is the easiest call, because a private transation would not change the ratio of its debt and cash. If Lee stopped paying its annual dividend and added those funds to its operating earnings to finance the purchase of its shares for a 20% premium over their price of $150 million, its debt-to-EBITDA ratio would be the same after the deal as it is now (5.3x).

The story would be roughly similar at McClatchy and NYT Co. If you add the dividend payments for MNI's common stock to its cash flow, its leverage ratio would be 4.7x after going private vs. 4.4x now. Following the same formula at NYT, the post-transaction ratio would be 5.3x vs. 2.3x today. The before-and-after difference is greater at NYT, because the Times would have to borrow $2 billion to buy its outstanding stock while McClatchy needs only $467 million to acquire its shares.

Given the depressed value of their shares and the relative ease of financing a potential transaction, companies like MNI and NYT could be on the radar of hostile takeover specialists. Although an unsolicited bid theoretically could be repulsed by the dual stock structure that gives the founding family at each company a veto over any unwanted overture, Rupert Murdoch demonstrated in his successful acquisition of Dow Jones that a clan’s resolve can be worn down with a sufficient amount of cash.

The Washington Post Co. would be less appealing to raiders because someone would have to borrow a prohibitive 10x earnings to take it private. The hefty financing would be needed because its common shares are worth $5.5 billion and its 16.5% profit margin is lower than the historic industry norm. WPO could go private by accepting additional equity from a friendly investor like board member Warren Buffet, but the Graham family would have to agree to the dilution of its holdings, plus a potential reduction in its preferred dividends.

A.H. Belo (AHC) could be taken private rather easily. It has no debt but sufficient cash flow to fund the loan that would be necessary to buy its shares. If management didn’t act, these characteristics would seem to make the companies vulnerable to an unwanted overture.

Scripps would have to take on too much debt to take iself private. In the initial version of this post, I stated that SSP could take itself private as the result of relying on erroneous information posted at Yahoo Finance.

The going-private route probably is not in the cards for Journal Communications (JRN) and Media General (MEG), because each would have to assume more than 6x debt. They could generate extra cash to de-lever themselves by spinning off assets, but this is a less than ideal time to be trying to sell newspapers.

Although the shares of GateHouse Media have been battered to the point that its market value is just $59 million, the company is unlikely to be able to go back to the private ownership it enjoyed until it went public in October, 2006. Because it already has borrowed 10x its operating profits, GHS could not qualify for a refinancing unless its existing lenders wrote off something like half of its debt.

Journal Register Co. is leveraged too far to borrow even the $5.5 million it would take to buy its shares at today’s closing price. JRCO already is out of compliance with its current lenders and an investor who recently made a tentative offer to help the company seemed to have backed off.

The Sun-Times Media Group (SUTM) is not a candidate, because it is losing more money than it makes.

Going private has several advantages over being a public company for an industry facing the sorts challenges affecting newspapers.

The public markets demand predictable and sustainable increases in sales and profits, or they punish a stock the way they have been spanking newspapers for the last few years.

Because newspapers have not found a way to reverse the accelerating deceleration of their sales, they have been cutting the heart out of the core product in an unavailing, self-defeating effort to reach high enough profitability to please Wall Street. But that has not been working, as the relentless pummeling of newspaper stocks attests.

In going private, newspapers can arrange the financings in a way to let them lower their profits for a specified period of time. During that respite, they could invest the resulting extra cash in reinvigorating their core print products and developing the interactive enterprises and niche print publications necessary to rescue their rapidly wasting franchises.

To be clear: Going private is not a panacea. It only works if sales rebound and profits grow in the fullness of time. Deteriorating revenues and profits will result in the sort of drastic budget cutting that has thrown the egregiously over-leveraged Tribune Co. into a state of utter turmoil.

A well-conceived going-private transaction (unlike Tribune’s) would give harried newspaper workers an opportunity to turn their full attention to the business of saving their businesses, instead of battling to sustain unsustainable profits. And they would be working for happier bosses, too, because going-private transactions typically result in significant bonuses for the executives who execute them.

So, everybody would win. Readers, advertisers, newspaper employees, publishers and the lawyers, investment bankers and lenders who engineered the deal.

Everyone, that is, except the former shareholders.

Disclosure: I own shares of JRCO, MNI and SSP.


Anonymous Anonymous said...

This post makes a hell of a lot of sense. Newspaper stocks are beaten down to the point now that no major broker has an analyst paid to follow them full-time, and I believe only one who follows them part-time. In plainer words, Wall Street believes they are not worth following because, as your previous post on the decline in the value of newspapers, pointed out.
I also believe taking the newspaper company private was the real strategy behind the recent SSP split, and maybe the BELO split as well. It could save GCI and the NYT from the misery of more layoffs, but it may be too late for MNI because of its groaning debt levels. Splitting up WPO into its lucrative Kaplan and not-so-lucrative newspapers could set the course for that company.
I see no hope for saving Tribune but a shattering and very painful bankruptcy. And overall, is there any workable solution emerging anywhere that saves any of the American newspapers from extinction?

6:43 AM  
Anonymous Anonymous said...

Ok, so how are the private companies doing? Doesn't sound too good from the screams of pain coming from the closed-door boardrooms. Hearst just dumped its CEO, allegedly for cutting deals the board didn't know about. Cox is slashing the payroll at the prized flagship at the Atlanta Journal Constitution, once much dearly loved by the Cox sisters. Newhouse has been more quietly cutting across-the-board, and not-so-quietly in Cleveland. Blethen's properties are a basket case. Even non-profits running the St. Pete Times are cutting. Then there is the case of the the recently-taken-private Tribune, of which we need to say no more.
As far as I can see, there's blood and carnage whether its private or public. So from the vantage of change-averse newsroom employees, there's no salvation in private hands

6:55 AM  
Anonymous Anonymous said...

I will probably agree with the underlying premise of your post that the days of public stock ownership of newspapers is passing. But, tell me Alan, how does Sir Rupert do it? News Corp. seems to thrive as a public concern regardless of storms or sunshine. Is it the foreign ownership which has diversified his holdings in Australia, England and the U.S.? Is it cross-ownership of TV and newspapers? He has an uncanny ability of making a mint by finding a niche inside established media -- aggressive Fox News conservatism in the middle of a American TV news market that prided itself on middle-of-the-road objectivity, for example. Or is he another Robert Maxwell, whose tangled affairs eventually unraveled? One thing about Murdoch is that while other newspapers are scrambling to move to the Internet, Rupert seems content with old-fashioned print journalism with Page 3 girls in England, and the WSJ this side of the pond.
Finally, to the point of your post, would Sir Rupert really be interested in any of these newspaper properties if they came to the auction block after bankruptcy?
(To the previous poster: don't forget Philadelphia, also taken private, and secretive Avista purchase of Strib. Both concerns look to be drowning).

9:08 AM  
Anonymous Anonymous said...

...Going private only moves the deck chairs on the Titanic if the same lefty, elitist attitude prevails at those ailing rags. Watching and reading the SacBee daily reveals a newspaper that's getting more sloppy, less newsworthy articles and columns and MORE lefty; distainfully and vindictively so. What anger the staff may feel about cuts seems to result in bitterness that comes out in their paper.

10:39 AM  
Blogger Chris O'Brien said...

I would caution anyone thinking about going private. As a MediaNews owned property, much of our short-term pain involves problems meeting the covenants of our debt obligations. These include maintaining a certain cash flow.

As it turns out, bankers are even less forgiving than shareholders. I think the Tribune folks are experiencing this as well. And even though McClatchy is still public, taking on more debt is probably the last thing they need right now.

All this debt in our industry is sucking away valuable resources that should be invested on new people, new idea, new products and new strategies. Instead, it's going toward interest payments that aren't adding a shred of value to what we do.

11:14 AM  
Anonymous Anonymous said...

The Minn Star was basically taken private when McClatchy sold that newspaper to a hedge fund.

That has been a disaster also. They are making the same cuts as the rest of the industry. The hedge fund has already written down 75% of their investment. Rumor has it that they are considering putting the Minn Star into bankruptcy.

Most of the public newspapers are still going through revenue declines of 15% annually. It is almost impossible to obtain financing with that sort of black hole facing the industry.

I doubt any of them could raise the money to go private.

I predict bankruptcy for McClatchy by 2010. They made a huge mistake by taking on so much debt to buy Knight Ridder in 2006. Horrible timing. CEO Pruitt was named worst CEO in the USA by Jim Cramer.

5:12 PM  

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