If the Very Rich Businessmen Really Get To Buy Newspapers Like The LA Times and The Boston Globe Then Look Very Carefully At Their Financing -- If It’s Their Own Money Then Fine, But If Its Leveraged Then Watch Out

Philip M. Stone November 5, 2006

The problem with newspapers today is not that they are losing money, far from it. The problem is that is getting increasingly more difficult to maintain the type of margins they are used to and for publicly quoted companies that’s a real pain.

Is the record sale of this going to help finance purchase of the Los Angeles Times?

So why are very rich businessmen waiting in line to buy such titles as The Los Angeles Times, The Boston Globe and the Baltimore Sun? They’re talking around $2 billion for The Times and $1 billion for The Globe and sister properties in New England,  – do these rich business people know something about running newspapers that professional media companies don’t?

Not really. They claim, rather, that they’re willing to sacrifice the high margins (20% plus) demanded by Wall Street and instead  finance high quality editorial products. And since its private money they don’t have to answer to Wall Street.  Except, unless those rich people are investing 100% of their own money instead of borrowing the funds then they have to answer to organizations far more severe than Wall Street – the buyout investment companies and the banks!

Look no further than the Philadelphia Newspapers. Remember the great joy in August when a local Philadelphia consortium of very rich local investors came up with $562 million? They were going to invest locally, forsaking huge margins. Jobs were safe. Just two months later and the roof fell in. Management is negotiating with unions on lowering costs, reducing staff, and with the Newspaper Guild in particular not wanting to hear any of it, a federal mediator is on the scene to try and sort things out.

The problem is grave. The new owners need to make $40 million in bank payments this year for their leveraged buyout, but the newspaper has seen its cash flow drop 50% in just two years so that its forecast to make just $50 million this year. Advertising in September and October dropped more than ever before and there are few signs it is going to pick up.

Now if those very rich businessmen with very deep pockets had invested their own money to fund the newspapers then those bank loans wouldn’t be there and the cash flow could support improving the editorial budget. But no, they went and borrowed the money and as good businessmen, when they see there’s not enough coming through the door to service the loans then out come the knives.

For the staff in Philadelphia it really makes no difference if an owner who is local fires you or you are fired by an impersonal corporate conglomerate.  Either way, you’re gone.

Just having local ownership is not the panacea of solving financial problems; what really counts is how highly leveraged is the money being used to run the business.  In some ways Philadelphia staff may already be looking back fondly at the good-old Knight Ridder days.

And so as things play out at the Tribune properties in Los Angeles and Baltimore, and if the New York Times Company can be really persuaded to sell the Boston Globe and the New England Newspapers to mogul Jack Welch for around $1 billion, what staff should really be looking at is how those deals are being financed.

It used to be thought that with local ownership it was good times ahead. The Philadelphia lesson is that is not so if the investment money is highly leveraged. Local ownership or some large impersonal media group, if there are loans, or leverage buyout companies involved, then they have to be paid back, and they are first in line.

Which makes it all the more interesting to watch particularly what happens in Los Angeles. Major Hollywood producer David Geffen is said to be willing to put up $2 billion of his own money to buy The Times.

Geffen, a billionaire who has made his money from running a music company to being a co-founder of the Dreamworks movie studio, had invested much of his wealth in a private art collection and in the past couple of months he has been selling. He sold a Jasper Johns and a Willem de Kooning for $143.5 million last month and just last week he sold a Jackson Pollock for $140 million, said to be the most expensive sales price for a single painting ever. The man is obviously raising cash – to buy The Times?

He is not alone. At least two other Los Angeles billionaires have expressed interest in forming a consortium to buy The Times. The newspaper currently maintains margins of 20% plus – indeed it provides about 25% of Tribune’s profit – but are the billionaires willing to seek a lower return on their investment for the sake of maintaining, even improving editorial excellence? If banks and buyout companies are involved in the financing then the day could come when the folks at The Times could look back fondly on the Tribune days.

Geffen, the other Los Angeles investors, Jack Welch in Boston, and those other rich pockets looking at buying the Baltimore Sun might want to remind themselves of what another famous billionaire, Warren Buffet – the second richest man in America next to Bill Gates – has to say about the newspaper business. And he speaks from experience having a major shareholding in the Washington Post Company and owning the Buffalo News.

He told shareholders at the last Berkshire Hathaway annual meeting:  

“Sometimes there’s a perception lag between the actual erosion of a business and how that erosion is seen by investors. Certain newspaper executives are going out and investing in other newspapers (was he thinking about McClatchy buying Knight Ridder?) I don’t see it.

“It’s hard to make money buying a business that’s in permanent decline. If anything, the decline is accelerating. Newspaper readers are heading into the cemetery, while newspaper non-readers are just getting out of college. The old virtuous circle, where big readership draws a lot of ads, which in turn draw more readers, has broken down.”

That very view was echoed last week by the publisher of the Copley Newspapers in Ohio that have just been put up for sale.

“The advertising model has broken down. The business model is changing. A lot of newspapers are making difficult decisions,” said David J. Greenfield, president of Copley Ohio Newspapers.

As for risk, Buffet feels far more secure investing in insurance against hurricane damage than he does investing in newspapers. By increasing that hurricane insurance business his Berkshire Hathaway quintupled its third quarter earnings.

When was the last time you heard of a newspaper company hitting double digit percentage revenue gains from one year to another, let alone quintupling its last quarterly earnings?

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