Triple Financial Whammy Afflicts Newspapers
If the newspaper industry was on thin ice a month ago, the financial
meltdown has meant that the creaking and cracking is getting more
audible. Think of it as a triple whammy for an industry used to
declaring itself the victim of a perfect storm:
- First, the meltdown has deepened, widened and — most hurtfully – lengthened the consumer spending downturn.
Consumer spending of course is a prime driver of ad spending. Fewer
dollars to spend — less money chases those dollars. Classified
advertising took the brunt of the first half, 2008 turndown, with real
estate, recruitment and auto all down in significant double digits for
companies across the board. Recent ad spend estimates (good rundown by PaidContent's David Kaplan) keep going south with the consumer economy, both print and online.
As online revenue growth numbers softened to barely positive or
negative, newspaper CEOs changed their emphasis, talking about emerging
more strongly in the hoped-for recovery. Now, with economist estimates
that we're going into a deeper recession, no one can predict when a
recovery might begin, but spring or summer of 2009 look the most
optimistic. That means that 2009 could turn out worse, potentially
significantly worse, than an awful 2008.
Reduced cash flow — the bete noire of the industry — is only getting worse.
- Credit lines are getting more taut. A number of companies
have reported credit line moves. McClatchy moved to buy two years of
breathing space, in exchange for higher interest rates and tying
dividends to cash flow. Gannett drew down its line. Publishers and
lenders are in hot and heavy discussion across the country on the
structure of debt, covenant ratios, cash flow, balloons and dividend
cutting. The only good news for publishers here is that lenders really
don't want to push publishers into bankruptcy, knowing that they don't
have much opportunity to make more of the assets than the current
managers. Further, the wider financial squeeze means that ailing
newspaper debtors are now one of the lesser problems many banks are
juggling. There may be some shelter in wider misery.
- The market for newspaper properties, too, may be frozen. We've
seen a glut of formerly enviable properties on the market, from Austin
to San Diego to Greensboro to Norfolk. Funny, these were the kind of
Sunbelt properties that only a couple of years ago McClatchy built its
strategy upon. As newspaper valuations have been halved to maybe 6X
EBITDA, these properties have languished — potential suitors spooked
by reduced and reducing cash flows and the prospect of having to
subsidize soon-to-be-unprofitable operations. Now, even the riverboat
gamblers out there would be hard-pressed to find someone to lend them
money to back their dreams. With the credit markets frozen, how much
would any willing lenders charge in interest rates to enable a deal?
Cash is really king, and those who have it are hoarding it, are less
likely (than even a month ago) to use it on a flyer to buy a newspaper.
The newly on-the-market San Diego Union-Tribune, long the
coveted jewel in many a CEO's eye (I can recall the Knight Ridder
yearning for it, following KR's purchase of the Contra Costa papers),
has had its tires kicked by seven or so suitors, we're told. My skepticism is similar to Editor and Publisher's Jen Saba, in her new Fitz and Jen blog.
It's great to get a peek into the travails and hidden treasures that is
now the Union-Tribune, but when it comes to a bid, fewer hands will be
in the air.
If we were to put together cash + San Diego, the name
"Ron Burkle" burbles to the top. Burkle, unlike the Tierney Philly
group and the Avista Minneapolis group, has pockets deep enough to buy
the paper, and subsidize operational deficits in the deepening
downturn. Is it a good enough deal for him? That'll depend on how much
he buys the potential of a "San Diego-dominant multimedia-producing,
local sales company" future. (Or, alternatively, he could bring along
Bill Clinton as Honorary Publisher, and let his speaking fees alone
make up for the ad shortfall.)
Burkle's cash aside, it's hard
to see the newspaper transaction business unlocking until credit thaws
significantly. Just today, Landmark lost its
sale of Nashville TV station WTVF to Bonten Media, when financing fell
through. That's a reminder that things, bad as they were, are worse.