When a Company Starts Messing With Pension Plans It’s Usually A Warning Sign Of Financial Problems, But This Is Gannett, The Largest US Publisher, Surely Things Can’t Be So Dire There?

Philip Stone June 13, 2008

Gannett made headlines twice this week and neither were good news items. It first announced a $2.3 billion (yes, billion) non-cash assets write-down, primarily the declining value of its Newsquest UK regional newspaper group, and later it shocked employees by messing with their pension plans resulting in the company saving around $30 million next year.

Now this is Gannett, the largest newspaper publishing group in America. It publishes 85 daily newspapers, including USA Today; it owns almost 900 other publications and 23 television stations. And by all accounts it is one of the very best managed groups, too, (it didn’t make a bid for Knight Ridder) and it is known for running a very tight financial ship. Yet its shares closed Thursday at $25.71, less than one dollar above its 52-week low – compare that to just February last year when the shares were more than $60 each.

Chief Executive Craig Dubow told employees quite bluntly in an email that the pension changes were made as “another important step in keeping Gannett financially strong.”  That sounds worrying, without the $30 million the company wouldn’t be financially strong?

Gannett has frozen contributions to its long-standing employee pension plan – that will save about $90 million annually – and is increasing contributions to another pension plan – the so-called 401(k) plan that allows employees to save for retirement while deferring income tax on the saved money and earnings until withdrawal. Usually the employee and employer contribute – in Gannett’s case instead of cash it will pay $1 of its own stock for every $1 saved by the employee, up from the 50 cents in stock it paid in before freezing its own pension plan.  The increased contribution will cost $60 million, so Gannett nets a $30 million savings.

Of course with the shares going down  being paid in stock  doesn’t look so attractive these days but DuBow in a statement earlier in the week said, “I can’t state strongly enough  my belief that our current stock price does not accurately reflect  the true value of our company or its potential”.

Gannett says it faces a “difficult business environment”, indicating that management doesn’t see newspapers returning soon to more profitable times and it is really hunkering down for the bad times to continue, perhaps to even get worse.

Gannett’s April numbers supports that reasoning. The company reported, "Total operating revenues for the fourth period ended May 4, 2008 declined 7.7% compared with the same period in 2007. Publishing advertising revenues in April were down 10.4% compared with April a year ago, retail advertising revenues were 6.1% lower in the fourth period, and classified revenues were 15.8% lower in the fourth period." The company has already warned that total Q2 earnings will be less than analysts had been expecting.

Standard & Poor's Ratings Services in May lowered Gannett’s corporate credit rating and senior unsecured debt rating one notch to "BBB+" from "A-." – still investment grade but S&P says the outlook is negative. "The slowing U.S. economy will likely continue to exacerbate operating weakness at Gannett, and this comes at a time when the company and the newspaper industry in general have experienced prolonged operating weakness due to a secular shift in revenue away from print advertising,” S&P said.

Its previous rating assumed that annual revenue declines in the newspaper publishing segment would not exceed the mid-single digits in 2008, whereas through April Gannett’s newspaper advertising revenue is down 10.3% to $1.51 billion.

By writing down its UK Newsquest group by up to $3 billion the company is reducing its asset-worth by around 19% – no small financial move. UK regional newspapers have been particularly hard hit by declining classifieds revenue – particularly for property and Q2 is reported to be particularly bad. But the Dubow explanation to employees for the write-down was really more about how the company’s shares have fallen, thus the company’s market capitalization is down by more than half in the past year (now $5.88 billion) and therefore asset value needs to be revised accordingly.

Gannett bought Newsquest in 1999 for £904 million then equivalent to $1.43 billion (at today’s rate of exchange, $1.8 billion). Newsquest has 17 daily newspapers and close to 300 weeklies. Gracia Martore, Gannett chief financial officer, told a media conference in New York that the company is still optimistic about Newsquest’s long-term prospects and she did not think it had been a bad acquisition.

Gannett currently holds about $4 billion in debt, but Dubow says, “We can pay our dividends and our debts, make strategic acquisitions and investments, and repurchase shares of our stock. There is no impact on our strong cash flow.”

Be that as it may, Goldman Sachs immediately slashed its financial earnings estimates. “While Gannett has a well-deserved reputation for sustaining above  average profitability through aggressive cost management, even the industry’s best managed company is not immune to current industry pressures.”

Writing down assets is now becoming quite common within newspaper groups that have seen their share prices decimated. McClatchy, for instance, in February took a $1.47 billion write-down on assets – mainly on the 20 Knight Ridder papers for which it ended up paying some $4 billion plus $2 billion in debt assumption two years ago – and that was on top of a $1.37 billion write-down taken in November. With its Thursday closing share price of $7.99 Wall Street now values the whole company at just $658 million.  

It seems the “tough economic challenges” that Gannett speaks about aren’t going away any time soon. If Gannett has to resort to what it is doing, then that cannot be good news for other newspaper groups either.