Thursday, July 11, 2013

The smartest guys in media give up on print

For all the corporate-speak accompanying the dramatic restructurings of Twenty-First Century Fox, Time Warner and Tribune Co., the simple reason these diversified media giants are jettisoning their publishing assets is that their leaders fear for the future of print.

In a historic capitulation, three of the largest companies ever built by putting ink to paper are severing their publishing assets to concentrate, instead, on the broadcast and entertainment portfolios that they hope will grow faster and generate more profits than the legacy businesses they are hastening to exit.  

The managers are separating their assets to protect the value of their broadcast and entertainment properties from the long-running deterioration of the publishing business that well discuss in a moment. First, the background:     

The scramble to divest publishing assets began a year ago, when Rupert Murdoch elected to separate his prospering broadcast and entertainment holdings from such diverse publications as the Wall Street Journal and the Sun of London.  Since the spinoff was completed last month, the shares of Twenty-First Century Fox, which got to keep all the thriving TV and movie assets, have almost doubled in value.  At the same time, the shares of the publishing company, News Corp., which got to keep the original name, have fallen by 16.5%.

Following Murdoch’s lead, Time Warner in March opted for divestiture after failing to sell  not only the eponymous Time Magazine but also such classic franchises as Sports Illustrated and Fortune.  This transaction remains to be completed.  

Not to be left behind, Tribune Co., after announcing a major acquisition of local TV stations earlier this month, said yesterday that it also would cleave itself in two.  One company would operate its broadcast and entertainment assets, while the other would publish the flagship Chicago Tribune, Los Angeles Times and the rest of the company’s newspaper holdings. 

The Tribune spinoff came as a surprise, as the company had been looking for a buyer for its newspapers. The decision to halt the sale process and move the properties to a new company appears to be driven in part by tax considerations (described here) but also may reflect a lack of buyers willing to as pay as high a price for the publications as the company had hoped to fetch. 

In the deals described above, stockholders of each media company will get pro-rata shares in each of their respective spinoffs.  The shareholders then will be free to hold, sell or buy more shares in either or both of the new companies.  This will create an opportunity for investors concerned about the future of publishing to invest in broadcast assets without having to worry about print.  Conversely, investors favoring print could sell their broadcast shares to add to their publishing holdings. 

By isolating one asset class from another, the media companies can assure that poor performance on the the part of print will not drag down the earnings and share values of the broadcast assets. 

An example of how this strategy might play out is what happened after Belo Corp. (BLC) in 2008 decided to keep its broadcast operations but spin its newspaper assets into a new company called A.H. Belo (AHC).  In the intervening years, the shares of BLC climbed from $10.60 to $14.36 at yesterday’s close for a gain of 35.5%, while AHC in the same period fell from $14.04 to 7.24 for a drop of 34.4%.  BLC got a big boost in when Gannett last month agreed to buy it for $1.5 billion.    

While the executives orchestrating each of these transformative transactions emphasized the potential for the newly separated entities to unlock fresh shareholder value, their desire to divest their long-standing publishing assets amounts to a vote of no confidence in the businesses on which their media empires were built.  

More than 500 years since Guttenberg invented modern printing technology, we have come to the historic moment that some of the smartest guys in the media business are giving up on print.  These are the daunting challenges that are running them off: 

Shrinking audiences. With digital technologies empowering individuals to acquire content when and where they want it, fewer consumers than ever see the value of subscribing to a newspaper or magazine that, owing to the unavoidable latency of print, often is out of date by the time it arrives.  As Gallup reported earlier this week, only 9% of Americans rely on newspapers and magazines as their main news source, as compared with 55% for television and 21% for the Internet.  The demographic headwinds for newspapers are even worse, as discussed here

Decaying revenues.  With advertisers following audiences to the web, smartphones, iPads and smart TVs, the combined ad sales of the nation’s newspapers have plunged by more than half since reaching a record $49.5 billion in 2005. Last year, the industry’s primary revenue stream amounted to a mere $22.3 billion. Although ad revenues at magazines have not fallen as drastically as those at newspapers, Time Warner’s publishing revenues slid from $5.8 billion in 2005 to $3.4 billion in 2012, according to its financial statements. Given these trends, it is no wonder that the print incarnation of the competing 80-year-old Newsweek, whose circulation topped 3 million as recently as 2006, succumbed at the end of 2012. 

Contracting profits.  Notwithstanding aggressive efforts to control expenses, shrinking sales have led to sharp declines in the enviable profits once enjoyed by publishers. To be sure, publishing profits generally remain ample: The earnings before interest, depreciation, amortization and taxes of the nation’s publicly traded newspaper companies in 2012 averaged 13.7%, or nearly twice the 7.7% EBITDA posted by Walmart, the largest Fortune 500 company.  But the newspaper industry’s profits last year were notably less robust than the average 24.2% realized in 2005. The story is similar at Time Warner:  Although TWX’s publishing division generated an impressive 30.7% operating profit in 2012, the return pales in comparison to the 56.6% margin delivered in 2005.

The substantial profitability still available to many publishers proves that the business, while wounded, is far from dead.  But the rapid – and so far irreversible – decline in audience, sales and profits over the last seven  years clearly has motivated the leading shareholders and executives of three of the most iconic publishing companies to exit the business before things get any worse.  

The silver lining for the freshly divested publishing companies is that their managers will be single-mindedly devoted to making them successful.  But the executives of the standalone companies will be operating in dangerous territory without the formal or tacit support they once received from their wealthier broadcast siblings. In other words, the newly liberated publishing companies will be working without a net. 


Blogger Racoon said...

Microsoft should follow the same strategy. Indeed, maybe they are!

5:44 PM  
Blogger Bruce Wood said...

Rupert made the change to shield his broadcast properties from the scandal in London. Spitting his company in two is hardly exiting the business. Did Belo leave the print business or the broadcast business? They still have newspapers but they're selling their broadcasting assets. Tribune spent 3 years in bankruptcy. "Smartest guys.." heh? And as you point out it may be a tax issue. Dodging taxes is what got them into trouble in the first place when they bought Times-Mirror. Speaking of smart guys, Warren Buffett is buying newspapers and he's certainly no dummy.

7:27 PM  
Blogger Mary Kay said...

Splitting companies is not uncommon - look at Kraft. It's a response to the market not fully valuing the high growth segment. One upside of the split is the opportunity for strategic print buyers to enter.

6:55 AM  
Anonymous Anonymous said...

Smart guys? You've got to be kidding.

With the exception of Rupert, who has his own unique issues, none of the "smart guys" you refer to actually run their media companies. These people are being run by Wall Street and investment banks. Let's not forget that those "smart people" actually bet big on newspapers by loaning them lots of money to expand and overextend themselves but got burned when their high profits undermined the very value of the properties they were giving money to (witness the first of many Journal-Register bankruptcies, once the darling of Wall Street).

Remember these "smart guys" also thought Apple was dead and basically got us into this economic depression. It's not about smart. It's just about greed.

A lack of innovation, guts and investment has hurt the newspaper industry. But what what put it in this mess in the first place was Wall Street and demands for ridiculous profits.

When the Providence Journal Company was privately (and locally) owned, our profit target was 12%. The minute Belo took control, that number jumped to 28%. The only way to accomplish that was to gut the place. And that began a downward spiral that continues today.

"Smart guys" like the ones buying and selling newspapers like used cars today, put no value in what a newspaper is or does or why journalism is important.

Let's hope at least a few of these papers land with people who are more interested in community, democracy and journalism and will "settle" for profits in the 8-12% range than newspapers would be able to support.

11:45 AM  
Blogger fierce pajamas said...

I'd be interested to hear opinions regarding the real estate - for example, is Tribune saying that the real estate beneath the LA Times, Chicago Tribune, Baltimore Sun will belong to Tribune Broadcasting?

Is that a tax move? Does it make it easier or harder to sell the newspapers?

2:45 PM  
Blogger Chuck Graham said...

Newspapers must go back to the community-owned model, where a high return isn't required and people who work at the newspaper care about their community and the companies who advertise with the newspaper.

The most important events in local politics and business aren't changing every 10 minutes,so people don't need updates every 10 minutes on their cell phones, etc.

The community needs in-depth reporting that gets printed and becomes a daily hometown record.

7:36 AM  

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