Friday, October 16, 2009

The un-sale of the Boston Globe

Given the scant hope of attracting a respectable price for the Boston Globe, it’s not surprising that the New York Times Co. pulled the paper off the market. The lingering question is why the company thought it had a shot of pulling off an acceptable deal in the first place.

In the latest sign of how far formerly coveted metropolitan newspapers have fallen, the offers for the Boston Globe apparently were less than 10% of the $1.1 billion the NYT paid for the paper in 1993.

By the Globe’s own account, the paper attracted offers of less than $100 million apiece from two separate investor groups, which each offered something like $35 million in cash consideration plus promises to assume $59 million in pension liabilities.

The modest interest attracted by the Globe is commensurate with the token consideration paid in such recent sales as those of the San Diego Union-Tribune (“less than $50 million”) and Sun-Times Media Group ($25 million). This is not to mention the unpublicized but presumably unappealing offers rejected by the owners of the Austin American-Statesman and the Miami Herald.

Net of the professional and brokerage fees normally associated with a transaction of this nature, NYT probably would have realized approximately $30 million in cash if it had sold the Globe for the prices offered by the potential buyers.

That sum scarcely would have made a dent in a balance sheet reflecting more than $2.6 billion in assorted liabilities, including $761.6 million in long-term debt at the end of June.

The fact that the sale was a non-starter should come as no surprise, as predicted here when the parent company launched a tortuous but eventually successful campaign to win $20 million in union concessions to help offset an anticipate $85 million operating loss in 2009. The effort to explore the sale of the paper commenced shortly after the unions abandoned the hope of retaining such cherished rights as lifetime job guarantees for 170 long-time employees.

NYT says it still is seeking offers for the Worcester Telegram & Gazette, the Globe’s little sister in the troubled New England newspaper division. Sales in the group, which plunged 20% in the first half of this year to $214 million, are 56% lower than they were in the same period in 2005.

The value of both New England papers already has been written down severely by the NYT.

The writedowns were required by accounting rules that require companies to periodically review the value of goodwill they claim for acquisitions. When the prices of assets plunge, as they have for newspapers in both the public and M&A markets, the owner is required to reduce the value of the affected assets and charge the writeoff against earnings.

The New England papers have been clobbered by those accounting requirements. Since 2006, NYT reports that it has written off $985.8 million of the combined $1.4 billion it spent to acquire the Globe and T&G. The Globe was bought for a then-record price of $1.1 billion in 1993 and Worcester was purchased for $295 million in 2000.

If NYT now turns its full attention to making a profit at the Globe, there is a chance it can start rebuilding the value of the franchise when the economy turns around. The trick, of course, in these tricky times for metro dailies is managing expenses tightly enough to make a profit on whatever sales it can muster.

While the good news for Globe employees is that they will remain in the NYT fold, the most interesting news is that the newspaper probably will begin operating more stringently than ever.


Anonymous Anonymous said...

I am reading forecasts by Wall Street analysts that advertising revenue at newspapers will continue to decline in 2010. I had expected it would be flat as the economy recovers. If a decline comes true, I'm really not sure the concessions the NYT got from the Globe unions will be enough to keep the paper going. Also note the NYT is embarking on what looks like an ambitious project of increasing local news in the Calif. Bay area, and perhaps other papers in major cities. This cannot be cost-free, and I do not buy the NYT explanation that these moves are only to solidify their existing paid circulation outside of New York. Even with payroll expenses flat, declining ad revenues can only increase pressure on the Times to get rid of marginal products not part of its core mission.

3:29 PM  
Blogger Steve Ross said...

Actually, the trick is to become more valuable to readers and advertisers. I get both the Globe and the NYT home-delivered.... and they are looking more and more like the same paper.

And, as good as is (and it is very good), where is the social network mechanism for myriad small, local advertisers who would pay a premium... and provide a continuous revenue stream after a high cost of acquisition.

11:25 PM  
Anonymous Anonymous said...

One might infer from your post that, somehow, the "accounting requirements" were at least partially to blame for the Globe's financial difficulties. In fact, the writedowns reflect the future expectations of substantially lower net cash flows generated by the Globe.

The mechanics of goodwill calcluation are future cash flow expectations discounted at the cost of capital to the financial statement date -- the economic value of operations. Tangible assets and contracts with determinable value are reduced from the economic value to calculate "Goodwill". So, goodwill is a calculation that represents a "mark to market" concept for operating companies.

From what you report, there will be more write-downs. Using the numbers you show, an outside buyer has offered $94 million in cash and assumed liabilities. The Globe, therefore has another $320 million to write down.

In summary, if you have no reasonable way to show a positive net cash flow in the future, you have no goodwill. The accounting write down -in the wake of Enron - reports the loss of value relative to the acquisition price. It's a trailing indicator of the NYTCo acquisition expertise.

6:59 PM  
Anonymous Anonymous said...

The greatest benefit for NYT in the deal was not gain from sale of an asset, but freedom from liabilities. I used to work for a magazine that fell into the same trap. A solid editorial brand plus web and e-mail newsletter franchises were practically given away because the owners wanted to escape the long-term liabilities of delivering an ad-supported print product in a down market.

9:20 AM  
Blogger Steve Ross said...

Wall Street analysts (with the exception of Laurie Rich Fine, who is now an academic) have always been idiotic when it comes to newspapers. Ad revenue has already started upward. So why would we expect a continued decline in 2010?

On the Globe, the original unfunded pension liability was on the order of $100 million; the drop to $59 million is evidently due to the stock price run-up.

My guess is that the paper will be cash flow neutral from Thanksgiving thru early January, so why sell it, especially as credit markets are loosening up and the NYT can borrow if it has to?

7:24 PM  

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