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Ownership

Ownership

By the Project for Excellence in Journalism and Rick Edmonds of the Poynter Institute

For decades, the newspaper ownership story was one of consolidation – big companies like Gannett swallowing up smaller ones.  Then for the last several years the momentum reversed. Big public companies, including Knight Ridder and Tribune, came apart and more than 10% of the industry passed back into private hands.

And 2008 marks a phase that may persist a while.  It was the year no one seemed to want to buy newspapers any more.

Not that there weren’t plenty for sale.  At year’s end, those on the block included the San Diego Union-Tribune, the Portland (Me.) Press Herald and the Austin American-Statesman (along with several other Cox papers). Landmark Communications papers – the Virginian Pilot in Norfolk, the Roanoke (Va.) Times and the Greensboro (N.C.) News-Record – went on the market in January 2008, but were withdrawn later in the year for lack of buyer interest. News Corp. tested the market for the half-dozen Ottaway papers it had not sold already and then decided to wait for better times.

There was a single notable exception. The Long Island paper Newsday was sold in May  to Long Island-based Cablevision for $650 million with competing bids from owners of the New York Post and the New York Daily News.1

Why did the market dry up so abruptly, when some of these papers could have presumably be purchased at relatively low price?  There were obvious and not so obvious explanations. Top of the list was the dismal state of the business – advertising revenues in steep decline and certain to get worse in 2009 before (and if) they get better later.  Nor, significantly, were there obvious turnaround strategies new owners might employ if they chose to take on a property at a bargain price.

To add to the flashing danger lights for prospective buyers, two private groups that had acquired metro papers in recent years – Avista Capital Partners in Minneapolis and Brian Tierney’s investor group in Philadelphia – were both struggling to make interest payments from their cash flow and comply with other conditions of their loans. Avista’s Star Tribune and the Philadelphia newspapers both filed for bankruptcy protection in early 2009. Financial markets have made credit tight, so a prospective buyer might have difficulty obtaining financing even for a still profitable paper in an attractive local market.

The notion persists that nonprofit ownership could be an alternative, given the deterioration of the for-profit business model for the industry. But the current volatility of the business and the scope of the industry’s challenges would put any investor’s money at risk, even one willing to forgo profits.

And by our reckoning, there is a significant question about whether the nonprofit model could supplant commercial ownership. How many communities could muster the tens or hundreds of millions in nonprofit capital needed to buy a newspaper and similar amounts to absorb potential short-term losses and invest in improvements?

For the moment, two other trends became features of newspaper ownership. In 2008, two public companies split in two.  A.H. Belo took the Dallas Morning News and three other newspapers to a new company, leaving its collection of local television stations in “old” Belo.  E.W. Scripps worked a variation, leaving its 15 newspapers and 10 local television stations in the legacy company while spinning its successful and fast-growing cable networks like HGTV and the Food Networks into a new company, Scripps Networks.

The transactions left the new companies debt-free and able to focus on transition to new business models.  But with weak operating results in the second half of 2008, neither got much buy-in from Wall Street. Scripps then closed the Rocky Mountain News in February 2009 after it was unable to find a buyer for it.

The other phenomenon of 2008 was the busted company but with individual newspapers still operating at a profit.  Tribune Company, which filed for Chapter 11 bankruptcy protection in 2008, was the most conspicuous case.  Its papers – the Los Angeles Times, Chicago Tribune and others – are not as profitable as they used to be, but still make money, just not enough to cover the staggering $13 billion debt obligation real-estate mogul Sam Zell took on when he took the company private a year earlier.2

Among public companies, Journal Register and GateHouse media closed 2008 effectively worth nothing, and Journal Register filed for bankruptcy in February 2009.  Once high-flying Lee Enterprises also saw its stock plunging to near-zero value as it had difficulty negotiating extension of one of the loans it used to buy Pulitzer in 2005.  Debt obligations were also weighing heavily on some private companies like Georgia-based Morris Communications and, to a lesser extent, Dean Singleton’s MediaNews (in which Hearst holds a large position and an option to buy a controlling share).

An assortment of scenarios will play out at these companies and others in 2009.  These include closing of some of the weaker papers or selling some and applying the proceeds to saving others. Some companies will operate under more explicit directives from lenders (not that they know any better than management how to turn the business around).

Without buyers in sight, it will typically fall to current owners (and their lenders) to do the best with what they are stuck with, playing out the present industry contraction and search for a lift in revenues to its conclusion.

Begging for Buyers: Paper by Paper

The lone 2008 financial highlight on the acquisition front was Tribune’s sale of Newsday to Cablevision for $650 million in late July.  In a year when many papers for sale attracted no buyer interest, Newsday was the exception.  The Long Island tabloid would have had operating synergies if combined with either the New York Post or the New York Daily News.  Both Rupert Murdoch’s News Corp. (owner of the Post) and Morton Zuckerman’s Daily News were runner-up bidders at $580 million.

The attraction for Cablevision was less obvious, though not without some business logic.  With 3 million cable television subscribers on Long Island, the company could use that base to sell newspaper subscriptions and sell advertising packages including both platforms. The combination might also offer possibilities for an Internet service provider experimenting with incorporating some subsidy for Web content into its access fees. The company’s controlling family – CEO James L. Dolan and his father, Charles F. Dolan – have acquired an odd mix of businesses through the years including the New York Knicks basketball team and the Sundance Channel.  It is inferred that with deep Long Island roots, they also simply wanted the prestige of owning the newspaper as Rupert Murdoch had coveted the Wall Street Journal. 3

The Newsday deal worked even in bad times: with a traditionally profitable paper in a strong market and suitors rich enough to absorb weak results or even losses for several years.  None of that came together in timely fashion for the many other newspapers on the block in 2008.

A group of Maine citizens, including former Senator and Secretary of Defense William Cohen, reached a tentative deal to acquire the Portland Press Herald and several smaller papers from the Seattle Times.  But as a deadline passed at the end of December, the group had not been able to nail down financing.

Similarly Landmark Communications announced that it had a buyer for its Virginian Pilot in Norfolk, but later canceled the deal because of the potential buyer had difficulty borrowing after Wall Street’s reverses. Landmark had earlier pulled the Roanoke (Va.) Times and the Greensboro (N.C.) News-Record off the market for lack of buyer interest.

The biggest paper for sale was Copley’s San Diego Union-Tribune (24th in daily circulation).  A decade ago, both the Los Angeles Times and the Orange County Register would have been eager to annex the huge market to their south.  But with the Times caught up in the Tribune bankruptcy and the Register’s parent, Freedom Communications, under financial pressure and selling newspaper properties, neither emerged as a buyer – nor did anyone else.

A final test case for how hard it may be to sell a newspaper was the Austin American- Statesman, which went on the market with several of Cox’s community newspapers in mid-August.  Besides the stable base of a huge university and state government, Austin is home to Dell computer and assorted other high-tech enterprises – an ideal fast-growing city market, in short.  Five buying groups have expressed interest but no deal has yet been struck.

While not exactly a sale, two newspaper companies – the New York Times and Media General – did attract an aggressive minority shareholder, sometimes the prelude to putting a company in play as happened a few years back with Knight Ridder. In each instance, the stock purchase was by Harbinger Capital Partners and Firebrand Partners, two high-profile hedge funds. They accumulated 20% of Times shares by early 2008 and were rewarded by two seats on the board (in exchange for withdrawing a competing slate) in March.

Harbinger/Firebrand’s position was that the Times needed to sell off old media properties and put the proceeds into digital acquisitions or start-ups. Some analysts spotted a hole in that logic early on.  Old media properties were trading at depressed prices (and that was before the worst hit), while any substantial digital enterprise commanded a premium.  So moving fast to change the mix of properties would trade away revenues and earnings for uncertain future prospects.

The Times management also countered that it was already doing what the insurgents asked – gradually moving to digital, selling television stations and other holdings along the way.  The Times closed the year by announcing it would borrow up to $225 million against the value of its new high-rise office building and putting its stake in the Boston Red Sox up for sale.4 So dire was its situation that an article in The Atlantic mused about its imminent demise – something the paper and other analysts dismissed.5

The Harbinger team took essentially the same approach with the same timing in acquiring a 18% share of Richmond-based Media General, a mid-sized collection of mostly Southern newspapers and local televisions stations. With support from longtime minority stake holder Mario Gabelli’s firm, it won three seats on the board in April.6 But by November, there was little sign that the company was embracing the Harbinger agenda and the insurgent group sold off nearly half its stake.

Both the Times and Media General have family control of voting stock.  They could not ignore their unwelcome associates, but, in the end, had the votes to stay on their preferred course.

Mega-Deals Revisited

We wrote a year ago that Sam Zell’s purchase of Tribune and the acquisition of Dow Jones, publisher of the Wall Street Journal, by Rupert Murdoch’s News Corp. showed that at least two money men had faith in the industry and were ready to put billions behind it.

The Murdoch bid had played out as high corporate drama with his premium $60-a-share offer gradually wearing down resistance among some members of the Bancroft family, which had majority control of the voting stock.  The sequel in the 18 months since has been less than tumultuous.

Murdoch did not, as some of his critics feared, gut the Journal, make it tabloid flashy or use its pages to push pet political causes.  He had promised investments in editorial improvement and did indeed increase the space devoted to foreign news.

Not that Murdoch took a hands-off approach.  He worked frequently from an office at the Journal.  He parted ways with managing editor Marcus Brauchli (who landed on his feet later in the year as the executive editor of The Washington Post).  In Brauchli’s place Murdoch installed Robert Thomson, a fellow Australian and former editor of the Times of London.

Those who thought Murdoch’s Journal would take on the New York Times for primacy as a general interest newspaper found some evidence as it pushed coverage of the presidential race out to the front page daily. In truth, though, the Journal did not come close to matching the breadth of the Times’ political coverage. Conversely it excelled, as one might have expected, at digging out some of the more arcane details of derivatives and hedge funds – the leading edge of the 2008 financial industry collapse.

There is doubtless more to come, but the Journal closed 2008 looking much the same as it had in mid-2007 – with some of the more conspicuous changes like re-sectioning and the Saturday edition the work of the previous regime.

Zell’s Tribune was a very different story – a painful downward spiral that began just days after he took control in December 2007.  Zell, candid and reasonably accessible, admitted the obvious – his winning bid for the company was made just as newspaper advertising turned from soft to tailspin.

Zell’s get-acquainted tour of his properties included several jolting exchanges.  He cursed out an Orlando Sentinel photographer after she had criticized running “puppy dog” pictures.7 He told the chain’s Washington bureaus that they were balkanized, way overstaffed and producing a large volume of journalism no one cared about.  “This is the first unit of Tribune I’ve talked to that doesn’t generate any revenue,” he said.  “So all of you are overhead.”8

Soon after, Zell installed Lee Abrams, one of several recruits from the radio industry, as “chief innovation officer.” Abrams’ lengthy, stream-of-consciousness “think piece” memos urged the troops to aim for splash and excitement.  Several of the Tribune papers quickly executed redesigns in roughly that spirit, emphasizing bold photos and info-graphics, while scaling back conventional stories. Dismayed reader reaction to some of this new look, especially at the Tribune, led to promises of more retooling.

Zell’s promotions also led to a notable exodus of some of the corporation’s most experienced and senior talent. Editor Ann Marie Lipinski and managing editor George de Lama of the Chicago Tribune resigned within months of each other.  Los Angeles Times editor Jim O’Shea and Baltimore Sun editor Tim Franklin also left later. Los Angeles Times publisher David Hiller and Chicago Tribune publisher Scott Smith, both longtime Tribune Company executives, also resigned. At least some insiders say the company also expunged many of the remaining Times Mirror managers and newsroom leaders and the influence – and tension – they represented. Many of the people atop Tribune are figures with relatively little record in the newspaper industry.

Tribune has now stopped reporting its financial results but in its final release for the first two quarters of 2008 said that it was roughly tracking the downward course of the industry.  For the second quarter, it reported cash flow of $221 million on revenues of $1.1 billion, but nearly all of that was needed to cover interest payments.9

As results deteriorated and more debt deadlines were looming for 2009, the company filed for Chapter 11 bankruptcy protection in early December.  So now both a creditors’ committee and the bankruptcy court will have a say in conducting the company’s affairs in the coming year, but it is too early to say what further disruptions that may bring to the company’s newspapers.

Some tensions were beginning to emerge under the new Newsday ownership as well.  In January 2009 editor John Mancini and two managing editors staged a five-day walkout after being pressured to soft-peddle a story about accusations of sexual harassment against a New York Knicks player.  (The team is owned by Newsday’s new parent company, the Dolan family’s Cablevision).

The top editors stayed out during both the dramatic rescue of the people aboard the airliner that crashed in the Hudson River and President Barack Obama’s inauguration, but they prevailed in their insistence on editorial independence – at least this round.

Nonprofits and the Future of Ownership

The events of 2008 and early 2009 keep alive the question of whether nonprofit ownership could be an alternative model for newspaper organizations.  It is certainly fair to say that many places the traditional for-profit structure is now failing to support the traditional editorial mission of newspapers.  It is also fair to speculate that if owners were not obligated to pull out substantial profits from diminishing revenues, they would have that much more money and flexibility in finding their way to new business models.

It is not so simple, however.  Even a newspaper owned by a nonprofit has to peel out some earnings for investments in the old print product and new ventures.  And a lightened commitment to turning a profit earns an organization no exemption from difficult industry trends.  The St. Petersburg Times, owned by the nonprofit Poynter Institute, for instance, contended with an even worse than normal-for-the-industry downturn in real estate and related advertising as did other Florida papers.

There is another difficulty journalistically. The executives of a nonprofit news organization (or community investment groups indifferent to profit) may be prone to stumbling into business mistakes or editorial conflicts. While some critics always worried about advertising wielding influence over the news. But most publishers always have understood that newspapers had so many advertisers that no single advertiser, or even group of them, could wield undue influence. That insulation is gone in a nonprofit arrangement if the funder has its own political or civic interests, and some other new firewall would need to be developed.

There is also no obvious roadmap for transition from for-profit to nonprofit status.  Unless the owner is ready to give the property away, who will pay a fair amount (or figure out what is a fair amount)?

Our sense, thus, is that the nonprofit sector is gravitating toward targeted and smaller scale online-only ventures unburdened by the traditional cost structure of existing newspapers.  We do look for many more of those, but only a few groups to try to buy an existing paper outright.

So what are the keys to relatively successful ownership headed into 2009 and 2010?  Paradoxically, the companies doing the best recognized the value of diversification years ago and invested in other growth businesses (the Washington Post’s Kaplan education and Scripps’ lifestyle cable networks).  Gannett continues to be an acquirer, but of early-stage digital companies.  Its only U.S. newspaper transaction this decade was a swap.

Top national newspapers like the New York Times and the Wall Street Journal or others with a traditionally high investment in news also seem to have an edge in holding readers and advertisers.

As a theoretical proposition, whoever first cracks the case of a successful transition to a new business model might have a running start at converting that expertise to bigger ownership positions.

In the meanwhile, also, 2009 will almost inevitably be the year when we find out what happens next when a newspaper company – with profitable papers – fails because it cannot meet debt obligations.

Footnotes

1.Suzy Jagger, “Cablevision Buys Newsday for $650M,” Times (of London), May 12, 2008

2. Andrew Ross Sorkin, “Tribune files For Bankruptcy,” New York Times, December 8, 2008

3.Tim Arango and Richard Perez-Pena, “Cablevision Offer Baffles Wall Street (Again),” New York Times, May 12, 2008

4. Staci D. Kramer, “New York Times Reportedly Shopping Its Red Sox Stake, Looking for $200 Million in Tough Market,” Paidcontent.org, December 24, 2008.

5. Michael Hirschorn, “End Times,” Atlantic, January/February 2009

6.“Gabelli Backs Harbinger’s Media General Slate,” Reuters, April 16, 2008

7.Ryan Tate, “Sam Zell Says, ‘xxxx xxx,” to His Journalist,” Gawker, February 9, 2008

8. From a recording of Zell’s meeting with Tribune Washington bureaus obtained confidentially

9. “Tribune Reports 2008 Second Quarter Results,” press release, August 13, 2008