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September 22, 2014

The Newsonomics of The Tribune’s Metro Agony

First published at Nieman Journalism Lab

Soon, the next act of the Tribune newspaper agonies will play out. That’s agonies, as in a Biblical passion play. The Tribune papers have endured a special kind of agony, the Hell of Zell, but really their story is the story of metro newspapers throughout the U.S. and now largely across the developed world. It’s a moment that will mark another major passage in American newspapering, and one that reopens big questions about the fate of metro dailies in American life.

The Tribune Company owns eight newspapers, six of them metros. Two — the Los Angeles Times and Chicago Tribune — are in top 10 of U.S. dailies; five — adding in the Orlando Sentinel, South Florida Sun-Sentinel, and Baltimore Sun — are in the top 40, while the Hartford Courant ranks 60th. Their likely sale will be the single largest sale of metro newspapers in the U.S. since McClatchy bought Knight-Ridder in 2006. (That sale included the Philadelphia Inquirer, Philadelphia Daily News, San Jose Mercury News, Miami Herald, Kansas City Star, Fort Worth Star-Telegram, Saint Paul Pioneer Press, Charlotte Observer and Akron Beacon Journal.)

Knight-Ridder was the second-biggest newspaper company in the country, after Gannett. Tribune was the third-biggest and remains that today, behind the New York Times Company.

Would-be Tribune newspaper buyers are doing their due diligence. (Once again, bring out the usual prospects, like Ron Burkle, the grocery magnate who found himself on the losing end of several newspaper auctions a few years ago and is often mentioned in lots of would-be deals.) Given the fortunes of the metro newspaper business over the span of Zell’s tenure (2007-12), they’ll find only one bright spot in the financials. That spot is price.

If you can find a buyer for a beleagured metro, prices are ridiculously cheap. Take the sale of the Tampa Tribune — the orphan paper left over after Warren Buffett’s Berkshire Hathaway Media bought all the rest of Media General’s newspapers. The paper sold for $9.5 million in October, the price of a top-end mansion in the area.

By way of comparison, Philadelphia’s papers have built a calamitous price history over the past decade, with their fifth owner taking over last summer. Interstate General Media, like many others before them, thought they were buying the papers at the bottom, at an incredible bargain price of $55 million. Here’s the quick roll of prices the combined Inquirer/Philly Daily News has sold for in recent years:

2012: $55 million

2010: $139 million

2006: $515 million

That’s the marketplace showing an 89% loss in value in six years.

Now those 2012 buyers have issued an ultimatum to the paper’s 11 unions: Renegotiate contracts now or we’ll liquidate. There are plenty of reasons to take seriously the term liquidation in Philly, and the unions have agreed to talks. What seemed like a gem of a deal is now a millstone. Talk about buyer’s remorse.

So let’s take a look at the newsonomics of these metro agonies.

First, revenue. Tribune’s publishing revenues dropped 51 percent between 2005 and 2011. (Newsday, sold off in the interim, would have been included in the 2005 data.) Tribune lost 5.5 percent of its publishing revenues in 2011, compared to 2010. Over 2005 to 2011, Tribune — because of its metros — underperformed the industry by seven percentage points. Over 2010 to 2012, it tracked the industry average.

Next, staffing. It’s Tribune Company policy not to release staff numbers, two top editors reiterated this week, “because headcount doesn’t tell the whole story about news priorities, organizational design, and other innovations.” True, but also nonsense; business reporters are seldom refused that basic information on employee count by the companies they cover. Clearly, the Tribune is trying to contain the public perception damage done by its cutting. Informed sources put the kinds of cuts at four of the Tribune metro papers at these levels:

L.A. Times: A high of 1,300 in 1998/1999. Now down to 500-550.

Baltimore Sun: A high of 400. Now down to less than 140.

Chicago Tribune: A high of 703 about 10 years ago. Now about 430, though that would include about 40 staffers working to produce editorial modules for Tribune papers around the country.

Hartford Courant: A high of 475 about 20 years ago. Now about 135.

The American Society of News Editors annual census shows a 27 percent decline in newsroom workforce since 1989. The Tribune newsroom cuts clearly seem to exceed that number. The overall decline amounts to a lot of journalism not being done. The Tribune paper decline is truly breathtaking.

Collectively, those numbers tell you why Advance has decided on its radical three-day-a-week printing schedule. They also put numbers to the unending troubles of the Tribune, and its fellow metros. In every way, metros under-perform smaller, community-sized papers — as many community publishers point out to me when they complain (justifiably) about media coverage that uses metro papers’ woes as a proxy for the entire daily industry.

Why do metros underperform? They are caught between the national/global players and community dailies. Community dailies — think those with 75,000 or less circulation — cover smaller geographic areas. More of their coverage is expressly local, meaning the stories may touch neighborhoods and issues known to readers. They also typically face less competition for readers and for advertising.

In the U.S., we have three national dailies. Both The Wall Street Journal and The New York Times struggle for profit, but have huge upside in terms of global scale, and we see those worldwide strategies now playing out strongly (“The Newsonomics of the New York Times’ Expanding — Hello Sao Paulo –Global Strategy“). USA Today’s options are more limited.

At their best, both national/global and community news organizations excel at uniqueness. If readers can get a critical mass of news from the NYT or the WSJ, or the Santa Cruz Sentinel or Lewiston Sun-Journal, those news companies can better hold on to both reader and ad revenue.

Since digital disruption began, metro papers have been slow to give up their traditional roles of delivering the whole world to readers. Much of the national and global news they offered, and which many still offer, can be found easily elsewhere by digital readers. Why read a narrow selection of truncated national stories when you can get the whole world (AP, BBC, Times, Journal, Guardian, among many) delivered to you without opening the front door?

Still, against all that data, there may be buyers for the Tribune papes. How might they place the right price on a Tribune newspaper?

They could start with the court-accepted value of the Tribune papers: $623 million. That’s the value bankruptcy-court–appointed financial advisor Lazard put on all eight newspapers last year. I evaluated Lazard’s own valuation (so you didn’t have to) and believe it’s a bit high — unless there is truly competitive bidding for the properties.

Tribune appears to have thrown off about $160 million in earnings in 2011, the last year available. Those earnings probably didn’t grow much last year, though they may have stayed constant, given the cost cuts.

Metro newspapers typically trade at about 3-4x of their annual earnings. At the high end of that, we get a number in the mid-$600 million range.

It’s now 2013, though, and the downturn in advertising only deepens, and with it, the struggle to both maintain profits and a sufficiently funded operation to produce that profit.

Tribune’s two community papers — Allentown, Pa.’s Morning Call and The Daily Press in Newport News, Va. — may go for 4-5x, given somewhat more stable markets. There are more Main Street buyers for such papers, and, indeed, Warren Buffett has already expressed interest in Allentown.

But it’s the likelihood of future earnings, of course, that drives these deals, and by that standard, all these metros are suspect. How much longer, would-be buyers must ask, will cost-cutting maintain profits? With revenues down across the board for years, profit has only been maintained through continued cost-cutting. If you’re down five percent or so in revenue, the math by now is fairly simple: You cut your way to the profit number that reasonably satisfies CEOs, boards, lenders, and the market. Poynter’s Rick Edmonds well summed up the five-year trajectory of public newspaper share prices recently. These stocks mostly beat the S&P 500 in 2012. Their rise, along with Buffett getting into the market last year, has buoyed hopes of a new stability — one that unfortunately isn’t matched by most of the revenue numbers we see.

We’ve seen reports of numerous would-be Tribune newspaper buyers, mainly in L.A. and in Chicago. In Chicago, Wrapports, the new owner of the Sun-Times, has hired an investment banker to assess the Tribune properties for purchase. In L.A., we’ve heard about interest from Rupert Murdoch’s News Corp. (“The Newsonomics of Rupert Murdoch’s Long Game“), new Orange County Register owner (and former Boston Globe seeker) Aaron Kushner, U-T San Diego owner Doug Manchester, a nonprofit civic group, and wealthy individuals, including Eli Broad.

In one of his first interviews, with his own L.A. Times, new Tribune CEO Peter Liguori was crystal-clear about the papers being on the block. Here’s how he answered the question:

Are there plans to sell the newspapers?

There are people interested in the newspapers. It is my fiduciary responsibility to hear them out and see if in fact their interest is real and their commitment is concomitant with the value of these newspapers.

That’s not a signal for a fire sale, but we all expect the Tribune newspapers to have different owners by year’s end. In part, that’s a recognition of the complexion of its new board. There’s not a newspaper guy among them, save ex-Tribune-CEO-and-still-remaining as L.A. Times publisher Eddy Hartenstein, who is really a TV guy who came to the Times. The board is made up of TV and entertainment guys; two of the seven, including Liguori, have News Corp. connections. It’s a company where a winter tan beats Lake Effect protection: Amazingly, there are no Chicagoans on the Tribune board. It’s tough to think about the Tribune, with its iconic Tower, without thinking “Chicago.” Now, the future of Colonel McCormick’s company, founded in 1847, is probably based more on superstation WGN than a newspaper.

Further, the market for newspapers is the best it’s been in five years. In 2012, 84 daily newspapers were sold in 25 transactions worth $642.83 million, according to data compiled by Dirks, Van Essen & Murray, a leading newspaper M&A firm. The big mover, of course, was the Media General sale, in which Berkshire Hathaway Media picked up 63 dailies and weeklies. Think of the newspaper market as parallel to the country’s real estate market: There’s more of a balance between buyers and sellers than there used to be, but prices haven’t recovered much from their lows.

So would-be metro buyers may buy at a bottom — or at a false bottom. As they assess these properties, these questions emerge:

  • Will the papers be sold as a group or separately? It would be cleaner for Tribune to sell the papers as a whole. Tribune has done a great deal of centralization among its newspapers over the years, including on digital operations, back-office, lots of technology infrastructure, and even centralized news-product creation out of Chicago. Those efficiencies make an argument for one company buying and operating the properties, perhaps in combination with others that company already owns. But assuming the turnaround of six struggling — and geographically disparate — dailies is a task it’s hard to imagine anyone taking on. In addition, Tribune will likely maximize pricing by conducting an active bidding in L.A., if several buyers are willing to bid up, and may find a similar proposition in Chicago. Expect multiple new owners.
  • Do regional synergies still matter? No one’s cracked the code on newspaper/TV joint operations. Combining print/digital operations, though, as the Sun-Times could do in Chicago or several buyers could do in L.A., is right in line with one of dailies’ prime strategies of the day: cost-cutting. Expect synergy-seeking buyers.
  • Are these trophy brands? Though their market value is historically tiny, the Times, Tribune, and Sun are iconic, and all six retain community sway far beyond their profits. For the right buyer, that’s worth money. Rupert’s got the most money available to buy new shiny objects.
  • Do deep-pocketed, civic-minded local groups have the stomach for the management challenges? Austin Beutner is putting together one such group in Los Angeles, configuring it around a nonprofit idea. Over recent years, as it appeared that the Baltimore Sun, Hartford Courant, Fort Lauderdale Sentinel, and Orlando Sentinel would hit the market, various local magnates and groups signaled interest. The big problem isn’t just coming up with the cash to buy: It’s figuring out how to operate businesses caught in a downward spiral.
  • How will government regulators play in the selling and buying decisions? The FCC’s cross-ownership prohibitions — newly under re-consideration — could complicate sales in Chicago and L.A. The Department of Justice’s antitrust division would have to cast an eye on a Sun-Times purchase of the Chicago Tribune. Mindful of those entanglements, the Tribune may opt for cleaner sales.

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