Tribune's Descent Sends New Shock Waves
Post-Bankruptcy Filing Content Bridges post
Has it been less than a single year? One year since Sam Zell took over
the Tribune Company as its management, like Knight Ridder's two years
earlier, simply ran out of juice and said, "hey you try it, we've run
out of ideas and energy?"
In one quick year — who's doing the
photo slideshow online? — we've seen what happens when the barbarians
do enter and start to rule within a formerly genteel kingdom. If it
were any other industry, we might see it more as entertaining, but when
it comes to the news industry, it's been jaw-droppingly sad.
As the Tribune prepares for
the possibility of a bankruptcy filing this week — and, if not now
then probably later — we can see the shock waves radiating out from the news:
- Yes, Sam Zell's words and actions have been outrageous,
sometimes outrageously and even refreshingly true — on
non-commissioned salespeople, on subscription pricing, on trying new
things — but in the end, it's not about Sam Zell. Look around.
Just in the last couple of weeks, we've seen Scripps sign the Rocky
Mountain News' death warrant; reports that McClatchy has shopping
around the Miami Herald (an offer that insiders tell me has been
floating around South Florida for months); the Journal Register
Company, living on borrowed time and about to shut down two dailies;
and Freedom's East Valley Tribune testing the very meaning of "daily"
newspaper.
The business model's busted.
Whether you
are good journalism advocate Gary Pruitt or it's-just-another-business
Sam Zell, the cards dealt are fairly similar. What separates Zell from
the pack, but maybe just barely, is the mountain of debt he gorged on
to make the ill-conceived ESOP scheme work. From Day One, he put the
sword over his own head and then cried wolf.
Along the way, we've learned that Zell isn't too good with math. He told Portfolio's Joanne Lipman just last month that:
we looked at the historical numbers, we saw an average erosion of about
3 percent. At the time we underwrote the transaction, we used a 6
percent erosion."
But look at Tribune's 4Q, 2007,
the quarter running up immediately to Zell's finalization (on Dec. 21,
2007) of the buyout, and you see that its publishing operating revenues
compared to a year earlier weren't down three percent or six percent.
They were down 13% for the quarter (and 9% for the year overall). So why would Zell budget half of what the last
quarter was telling him, as newspapers' deeper decline was evident for all who, well, evident for all those those who read newspapers.
I
suppose in a more trusting time we might have expected lenders
Citibank, Bank of America, Merrill Lynch and JP Morgan to have actually
vetted his numbers. But hey, they were probably no-doc loans.
- We'll see if this is the first bankruptcy domino in the newspaper business.
In the wider financial meltdown, newspaper companies have become just
part of a much larger problem. Creditors have been eager to work with
McClatchy, Lee, MediaNews, Freedom, Gannett and others — just about
everybody — to adjust lending terms. They've loosened (in the short
term) covenants linking (diminished) cash flow to debt, given term
extensions — and picked up a little vig on interest rates. They seem
to so far figure that that's a better route than forcing the companies
into bankruptcy. A Tribune filing though may lead to lender rethinking,
in what we've learned is a herd trade.
- If talk of default increase and bankruptcy is ramping up now, what about March? The
consumer recovery, at the most Obamamistic, is six months away. As with
the sudden Rocky announcement Friday, we're seeing newspaper companies
increasingly throwing in the towel. Once those 4Q revenue numbers
trickle out, it'll be worse.
- There are two bad markets determining the fate of newspaper
companies now. One, of course, is the news and advertising market.
Print ads are down toward 20% and online will decline mildly this year.
And here comes the latest 2009 forecasts — down 3-6% overall — to be presented at Monday's UBS Media Conference.
The second, of course, is the real estate market. We all
know the story there, yesterday's story. If you had to bet, though,
which market will come back first, newspapers or real estate, you'd
have to bet on real estate. And therein may lie the next newspaper
industry act. Whether it is McClatchy trying to sell bayfront Miami
Herald land, or Tribune selling the Colonel's Tower, the fate of
newspaper companies may depend on the real estate recovery. If that
land and/or the buildings on it seem to be coming back to commercial
life, newspaper companies or their lenders may see new moves. And that
may determine a good deal about what we'll have for daily reading by
2010 and 2011.
