McClatchy Taught The Big Newspaper Chains A Powerful Lesson: Keep The Best and Leave The Rest. And That Wall Street Likes!

Dow Jones, publisher of the Wall Street Journal, has announced it is selling, or if necessary auctioning, some of its Ottaway newspapers. It reasons the money made by dumping those newspapers can be put to better use by paying down debt and making future digital investments.

The Journal Register Company, owner of 27 daily newspapers and 366 non-dailies, says it is putting up for sale its five New England daily newspapers and 21 weeklies. It’s not that those newspapers are doing badly – wouldn’t you be happy with businesses providing a 22.5% margin? – but that profitability pales to the 25% that is the company norm. And coming in below target indicates to chairman/ceo Robert Jelenic that those newspapers are in slow-growth markets.

A Journal-Register statement summed up the thinking that seems to be going on now in the corporate boardroom of the big US newspaper chains. It said the company was “focusing our efforts on those operations, including our growing online operations, which generate a higher return on capital and produce a higher level of profitability and cash flow.”

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Newspapers Start To Produce Better Numbers From Their Print Operations, and Their Internet Activities Continue Amazing Growth, But Three Major Wall Street Analysts Say Its Way Too Early To Say The Worst Is Over
The New York Times in May posted its highest monthly growth increase so far this year, 4.4% compared with last May and online ad revenue was up 27%. The Wall Street Journal reported its May advertising was up 10.1%, but for all that Wall Street analysts say they want to see more than one month of good figures before giving any thumbs-up for the industry.

Gary Pruitt Says It Would Have Been Inconceivable A Few Years Ago To Have Bought Knight-Ridder For Such A Low Price. Wall Street Says McClatchy Would Have Done Better Buying Its Own Shares and Calls The Newspaper Industry “A Stinker”
Gary Pruitt is fond of telling people that he made a great financial deal in buying Knight-Ridder’s 32 newspapers for “only” $6.3 billion including debt assumption – such a low price would not have been possible just a few years ago when newspapers were in favor with Wall Street. But Wall Street has its final say – the money would have been better spent on McClatchy buying its own shares.

Google’s Capitalization Drops $20 Billion In One Week, Yet It’s Still Worth Nearly Double All Publicly Quoted Newspaper Stocks on the US Markets Combined. But Might Rupert Murdoch Be Preparing to Out-Google Google?
It was a bad week for Google. It started when Yahoo’s fourth quarter earnings, although good, came in just under what Wall Street expected. So Yahoo got dumped on and in Wall Street’s natural way it also sold off its prime competitor. And then the week ended with a double whammy – news broke that Google was fighting a US Justice Department subpoena to hand over one week’s worth of search requests and Wall Street on Friday suffered its worst loss in almost three years.

Dow Jones Dumps Its Wall Street Journal Publisher and Kicks Her Husband, the Company’s CEO, Upstairs Temporarily to Chairman, Wall Street Rejoices With A One-Day 10% Share Price Increase And With Knight-Ridder For Sale, Traders May Finally Be Seeing Some Results They Like From US Newspapers.
Tony Ridder didn’t have much choice. His three largest shareholders said they wanted to see Knight-Ridder sold to achieve shareholder value and there wasn’t much he could do about it and the sales process is in full swing. But Dow Jones is another matter. While a public company it is still controlled by the Bancroft family and the family really hasn’t been that active in pushing for a better performance. Until now. In one swoop the company ceo is out come February 1 -- kicked upstairs as chairman until he retires in a year -- and his wife, the Wall Street Journal (WSJ) publisher, has been given two months to pack up her office.

All Wall Street Really Wanted to Finally Rocket US Newspapers Shares Up Was Some Good News, And This Week, Finally, The Industry Delivered. And so Did Wall Street
First it was the New York Times that reported, unexpectedly, that its November advertising revenue grew 5,8% from November, 2004. Then the Wall Street Journal announced a 34.3% gain in classified advertising from the same month a year ago. Sure, this year there are the Saturday editions but it was clear to Wall Street that something positive was happening.

The company says it wants to pay back debt – it carries $740 million of debt and Standard & Poor’s last month lowered the debt rating from high junk to lower junk (junk obviously is no longer just junk any more). It also plans to buy back shares – in other words make the right moves to get the share price up.

It needs to do something. Before the announcement the shares were around $6.75; the announcement sent them up 3.7% and its current $7.50 shows further how much investors like the idea, but It is still way down from its 52-week high of $19.45.

Its share fluctuation is as good an indicator as any to show what has happened to US newspapers in the past nine years. The company went public in 1997 at $14. A year later the shares had reached $23 and then turned gradually down but it became a mudslide late last year.

Merrill Lynch said the proposed sale was a good move and buyers could be willing to pay around 10 times earnings, but even so it maintains its sell recommendation because the Journal Register is so heavily into print, and not so diversified into other activities such as online.

At Dow Jones, where six of the Ottaway newspapers are up for grabs, there’s a $155 million tax credit that needs to be used by the end of the year. Dow Jones hopes to get about $300 million for six titles and then, besides paying down some debt, it wants to further invest in online ventures.

The company is focusing its attentions on combining the print and online activities at the WSJ and it has an overall target of having a 50-50 digital-print business. Being rid of those Otttaway papers now and investing some of that money in online ventures will get it to its target that much faster.

Debra Schwartz at Credit Suisse applauds Dow Jones move. “It gives the company more opportunity to build its digital businesses,” she said. DJ’s shares have been moving up in the past couple of months as the WSJ reports higher advertising revenues, but at $35.48 it is only $3 above its 52-week low and well shy of its $42.23 52-week high.

Newspapers have been busy the past few years cutting back on expenses to try and maintain historically high margins of at least 20%. Newsrooms and other departments all have lost staff, and it seems hardly a week goes by that there is not some sort of cost-cutting announcement. Tribune, for instance, this week announced that its newspapers in 10 cities are eliminating their own circulation call centers and are outsourcing those operations to a company based in the Philippines – it’s all part of the $200 million plan to cut Tribune costs.

But there is just so much that one can do to cut costs, and if online revenues are not enough to make up print’s deficit – at the moment they are not – then the next step up the ladder is to get rid of the poorest performing newspapers. And that is a page right out of McClatchy’s book.

When Knight-Ridder put itself up for sale everyone expected the big chains – Gannett, Tribune and the like – to be in there with bids, probably at bargain basement prices, since newspaper valuations on Wall Street were so low and still going lower.

Only McClatchy of all the US newspaper chains bid to buy all of Knight Ridder, but once it had them it sprung surprise number two – having paid $6.5 million for 32 newspapers it announced it was dumping the 12 that were in the least-performing markets – the margin producing weakest of the litter -- and it grabbed back $2 billion from those sales.

None of the big groups had wanted to put up billions to buy all those Knight Ridder newspapers – McClatchy got a good deal for its $6.5 billion. The big chains and private venture companies wanted to pick and choose those Knight Ridder papers they wanted but Knight Ridder was not going to let happen for obvious reasons. Only McClatchy stepped to the plate with a view that the right kind of newspapers did have a future but also with a business plan (that it withheld from Knight Ridder) that it would keep only those newspapers with high operating margins and sell-off those in poor performing markets.

There were tax consequences to doing it that way, but McClatchy clawed back around $2 billion of the $6.5 billion and for that it got Knight Ridder’s 20 best financially performing newspapers.

It’s what happened next, however, that has everyone’s attention. For many of the newspapers put up for sale it was local entrepreneurs who stepped forward who said they wanted the newspapers to have local ownership and truly be part of the community. In other words there are buyers out there for individual newspapers for purely local community reasons, whereas there may not necessarily be buyers out there for groups of newspapers.

The Philadelphia newspapers may be the best example – there is a lot of money and good-will behind the new local ownership – but the Philadelphia newspapers had cut back their editorial numbers horribly during Knight Ridder and they still struggle to make the type of margins that is the norm for most newspapers. New management is investing in a big, expensive marketing campaign and the question becomes for just how long will local ownership put up with poor returns before they become true business people again – rather than sentimental business people -- and say that on a business sense things cannot remain as they are.

US newspaper chains now see a window where local is “in” but there is no telling for how long that window stays open. So now Dow Jones, Journal Register, and probably more to come, are testing the waters while they can.

By the way, just how is McClatchy doing these days now it has those 20 Knight Ridder newspapers? McClatchy’s 52-week high was $67.23 but it has not seen that price for some time. Once it announced it was buying Knight Ridder its stock went into gradual decline, especially when its debt was rated as junk, and it closed at $39.03 on June 27, the day it acquired Knight-Ridder. Today it’s just a little higher at $40.86.

It’s as though Wall Street is saying with the McClatchy deal that it wants to see how things work out for a while before giving newspapers a real vote of confidence.

Philadelphia Papers In Trouble Just Two Months After McClatchy Sale - October 21, 2006

Everyone was on a high when McClatchy sold the Philadelphia newspapers to local ownership – an ownership that appeared to have very deep pockets.

Publisher and lead investor Brian Tierney has written to staff that “We are in a very difficult position.” He cited significant falls in advertising since last year (September was down 10.2%) and the projection is that October and November will be even worse.

McClatchy sold 12 newspapers it had bought from Knight Ridder that it did not believe were in growth markets, including the Philadelphia Inquirer and the Daily News. The figures Tierney produced seemed to prove the point McClatchy did the right thing in Philadelphia. .

Tierney said in 2004 the Inquirer and Daily News provided Knight Ridder with $100 million cash flow; In 2005 it fell to $76 million, this year it is projected at $50 million but because of bank loans it falls to just $10 million.

“Simply put, this dramatic revenue decline will prevent us from meeting our bank obligations if we don’t take absolutely critical actions on the cost side of the business,” he said.

The bottom line in the letter: We need to significantly restructure our labor contracts and our workforce …We must reduce our workforce so that it is in line with our reduced revenue. To the extent we don’t get the savings, those layoffs will be larger.

Just two months ago there was great euphoria when local ownership took over the newspapers. Now, déjà vu?

McClatchy Taught The Big Newspaper Chains A Powerful Lesson: Keep The Best and Leave The Rest. And That Wall Street Likes!

US newspapers chains are trying to sell their worst financially producing newspapers and for once they are getting high marks from Wall Street.Go To Follow Up & Comments

Philadelphia Papers In Trouble Just Two Months After McClatchy Sale - October 21, 2006

US newspapers chains are trying to sell their worst financially producing newspapers and for once they are getting high marks from Wall Street.
Go To Follow Up & Comments