By the Project for Excellence in Journalism and Rick Edmonds of the Poynter Institute
To read the financial press you would think 2007 was a year of big deals and high promise in the newspaper industry. Sam Zell took Tribune private in an $8.2 billion deal, and Rupert Murdoch’s News Corp successfully bid $5 billion for Dow Jones and its Wall Street Journal.
Fair to say, those two events were positive proof that at least a few people with money see opportunity in newspapers, where most predict trouble and more trouble.
In general, though, the deals were an exception to a cooling interest during the year in newspaper properties among prospective owners:
■Murdoch’s acquisition raises some familiar issues about consolidation and financial muscle dominating the industry. Much more common, though, were big companies selling off papers or otherwise breaking up their businesses.
■With earnings slowing sharply, companies that have borrowed heavily to finance acquisitions face tough debt and credit issues. With deep cuts and sales of less essential businesses, they may be scrambling in 2008 just to pay interest owed lenders. That list could include Zell and Tribune. Less-leveraged companies are better positioned to invest in online expansion and give loyal print readers the news report they expect.
■In early 2008, several groups are for sale – Dow Jones’ (now News Corp.’s) 15 remaining Ottaway community papers and Virginia-based Landmark Communications. More may become available. But prices are depressed. Like homeowners in the current down market, existing ownership groups may be inclined to wait for better times. Difficult years for Brian Tierney’s local investor group in Philadelphia and the private venture Avista Capital Partners in Minneapolis may also have chilled potential nontraditional owners who were beginning to emerge as players in late 2006.
■News Corp. is a publicly traded American company and Murdoch a naturalized American citizen (a requirement for him to buy local television stations in the 1980s) but the fortune behind a premium bid for Dow Jones was largely made abroad. With a weak dollar, American newspaper properties appear ripe for picking by foreign investors in 2008. To date, though, except for a few Canadian ownership groups, it has not happened. Perhaps, given the cultural and political nature of newspapers, investors sense that distant foreign ownership would not go over well with hometown audiences.
■The roster of defunct publicly traded newspaper companies in the 2000s now has risen to four, with Tribune and Dow Jones joining Pulitzer (acquired by Lee in 2005) and Knight Ridder (acquired by McClatchy in 2006).
■Two more public companies – Belo and Scripps – plan to split in two in 2008. The deals aim to add value to the more profitable and/or faster growing parts of their holdings on the theory that having newspapers in the mix drags down the share price of the whole. At the same time newspapers and Web development will receive attention their special circumstances merit and, in the case of Belo, begin a second life debt free.
In earlier editions, this part of the report and the News Investment section following have examined the variety of ownership structures – publicly traded, private, family and nonprofit – and made distinctions between those aiming for high short-term margins and more long-term oriented and optimistic proprietors who see a payoff from investments in news quality.
These distinctions are still relevant, but the intensity of current economic pressures has had a leveling effect. Wall Street in recent years has been more interested in “top-line” revenue growth than in bottom-line profits. Two bigger proponents of the bottom-line focus — Knight Ridder and Tribune’s former owners — are now gone. That leaves the remaining high-margin crowd, Gannett to an extent, and Journal Register particularly out of favor with investors.
That focus of Wall Street represents a change from the best days of the newspaper business, when things were so good investors seemed to gravitate to companies, like Gannett, that were growing by acquisition and making those papers more profitable. Now, the market wants more proof of a long-term strategy.
At the same time, however, companies willing to accept single-digit margins in an off year like 2007 — the Washington Post newspaper, the Newhouse family’s Advance chain — are hardly immune from pressure. They can see red ink around the corner. That is not sustainable for very long for any ownership structure.
Transactions of 2007
Tribune was put into play as an acquisition target in spring 2006 at the urging of the Chandler family, owners of 20% of the company’s stock received when Tribune took over Times Mirror in 2001. The Chandlers’ SEC filing included a scorching critique of Tribune management, accusing it of pursuing a failed strategy and steering the company to one of the worst performance records among public newspaper groups.1
More to the point, the Chandlers were ready to cash out. They hoped that a buyout would come at a premium (shares were down 50% from their peak) and figured they could shed potential tax liabilities in the process.
An extended auction followed with expressions of interest from various private equity firms and from Los Angeles billionaires David Geffen, Eli Broad and Ron Burkle, each of whom hoped to acquire the Los Angeles Times if the company was sold in pieces.
Ultimately Broad and Burkle bid for the whole company, but the winner of the auction in April 2007 was Chicago real estate mogul Sam Zell, who offered $8.2 billion and assumed $5 billion in debt.2
The financial deal was a complicated transaction in which a large share of the purchase funds came from the Employee Stock Ownership Plan. Simplifying slightly, Zell, not the employees, controls the company, but they stand to benefit should Tribune prosper but will not lose money or retirement benefits if not. And the structure allowed the deal itself to be virtually tax free.
Zell, a colorful character and motorcycle enthusiast, was known as the “grave-dancer” during the mergers & acquisitions boom of the 1980 (an unfortunate juxtaposition to the current state of the industry). As potential owner through most of 2007 and proprietor once the deal closed in December, Zell has been accessible to the media and bullish on the industry but vague on details of his turnaround plan. In a round of pep talk visits in January 2008, he told newspaper staffs he would encourage “bottom-up” management and individual employee initiative, an allusion to the heavy-handed corporate directives of the Tribune management he has replaced.
But in those early conversations with staff, he is also indicating a tough focus on the bottom line. During a testy exchange with an Orlando Sentinel photographer that ended with Zell cursing her out, he said, “My view of journalism is that I want to make enough money to afford you.”3
The sale of Tribune, the second largest-newspaper company after Gannett, constituted a big deal with a spicy accent of boardroom drama. But bigger and more dramatic was right around the corner.
On May 1, Rupert Murdoch announced unexpectedly that his News Corp. was making a $5 billion offer for Dow Jones.4 At $60 a share, he was offering a hefty 60% premium over the price at the time. The reality was that Dow Jones had been limping financially for years despite a strong paid online site, initiatives to improve the Wall Street Journal editorially and an assortment of lesser-known specialized online business information services providing most of the company’s earnings. The model that had served Dow Jones so well for years, finding the CEO from within the Journal newsroom, faltered with Peter Kann at the helm. When Kann retired in early 2006, the company went to Rich Zannino, a financial executive whose career had been in fashion clothing at Saks and Liz Claiborne before he joined Dow Jones.
It later transpired that Murdoch had coveted the Journal for more than a decade, disclosed his intentions to Zannino before the offer became public and had calculated that an eye-popping premium would be needed to overcome potential resistance from the controlling Bancroft family.
Wall Street, a veteran handicapper of such situations, immediately bet on Murdoch, bidding Dow Jones stock up into the high $50s per share. It remained at that level until the offer was accepted July 31. But there was plenty of ink and angst over whether the deal would be done in the three months between.
Unlike the Sulzbergers at the New York Times or the Grahams at the Washington Post, who have continued to operate the publicly traded companies their families control, the Bancrofts had a majority of voting shares but no individuals active in day-to-day management for decades. There were sensitivities to a legacy of maintaining the Journal’s editorial quality and independence but, as in so many of these family dramas, there were factions as well.
Letters and shifting coalitions among the 40 or so Bancroft heirs ensued, with questions raised about Murdoch’s intentions and those of fellow family members. Dissenting family members were joined by board member Jim Ottaway, a publisher who sold his community papers to Dow Jones in 1970 and vehemently opposed Murdoch’s purchasing the company and the Wall Street Journal.
In the end, money talked. Family members realized that an offer of that magnitude was unlikely to come along in the next decade, if ever. With some behind-the-scenes coaching from Zannino, they also decided that Dow Jones, badly damaged by a failed electronic venture (Telerate) in the 1990s, did not have the capital on its own to take the company to the next stage – particularly against tough competitors in electronic financial information, including Bloomberg, Reuters/Thomson and Pearson.
And given the unique nature of Murdoch’s empire, which includes cable news in the U.S., a fledgling business channel, and news channels abroad as well as MySpace and newspapers around the world, Dow Jones may have been more valuable strategically to his News Corp. than any other possible suitor who might have been sought out as an alternative. Putting aside whatever desire he might have for a journalistic crown jewel to burnish his reputation in an industry where his financial bravura is more respected than his publications, no better offer was forthcoming.
The deal, like Zell’s, was not finally completed until December. Murdoch has an office at the Journal, has installed several of his British and Australian lieutenants in key management positions and plans to move the newspaper away from Wall Street to News Corp’s midtown Manhattan offices.
Murdoch’s plans are not entirely clear. He speculated out loud about changes, including making all Dow Jones online content free, but insiders say now that some of that was simply musing and was far from certain. In January, for instance, Murdoch backed away from previous statements that he would take WSJ.com from paid to free, settling instead on a structure in which more material would be offered free but full access would remain paid.5
Some see his preference for shorter stories endangering the paper’s tradition of lengthy Page One “leders” or the kinds of huge investigations that a reporter might spend a year on. But as this report is being edited for publication, it is too early to say how drastically he will remake the Journal editorially or how he will integrate Dow Jones various Internet businesses (many of them international) into News Corp.’s existing global network.
One musing that seems more likely, given his past history and word from Journal senior staff, is that the Journal may move toward offering a more general-interest diet of news, making its paper and particularly its Web site a more direct competitor to the New York Times.
Other observers will be watching to see whether the Journal’s coverage of China – a Pulitzer Prize winner in 2007 – will retain its hard investigative edge given Murdoch’s huge business interests there.
A takeaway from these two big deals is that trophy newspaper properties still have an appeal to the super-rich of a certain age who can afford to buy what they want. Should the New York Times, Washington Post, Los Angeles Times or Boston Globe go on the block, similarly motivated individual buyers might come forward (though there is almost no prospect that offers for either the New York Times or the Post would be entertained).
Other 2007 Deals and 2008 Prospects
Elsewhere in the industry, a more defensive scenario has set in.
Belo took the unusual step of announcing in October that it would break the company in two.6 E.W. Scripps, in slightly different fashion, followed suit two weeks later, and there may be more such deals to come.7
The immediate impetus was that Belo was hearing from the investment community and analysts that part of the drop in share price was because murky prospects for newspapers cast a shadow over its more profitable local television station group. As soon as the plan was announced, Belo stock staged a modest rally.
A side benefit is that the remaining Belo will be the largest publicly traded local-television-only company, thus an attractive buy for those who like the prospects for local television. The spinoff, A.H. Belo, will have just the company’s four newspapers – the Dallas Morning News, the Providence (R.I.) Journal and the Press-Enterprise of Riverside, Calif., and the Denton Record-Chronicle. – and associated electronic and niche businesses. In theory, this allows for tighter management focus on transitional challenges particular to the newspaper business.
CEO Robert Decherd elected to stay with the newspaper side of things (in part because of family tradition) and to structure the split so that all existing debt is assigned to the television group. The debt assignment may help the newspapers to take whatever money that would have been used to service debt to invest in innovative ideas, presumably online. A question remains of how well a newspaper-only company can do with investors.
Scripps elected to leave both its newspapers and local television stations in one company (retaining the E.W. Scripps name) and spin its growth engine, cable networks including HGTV and the Food Network, into a new company (Scripps Networks). Though the structure is slightly different, the idea is the same. Scripps has been a relatively strong stock market performer among newspaper companies because of the success of the cable networks. The thinking is that it will do even better without newspapers dragging the share price down. CEO Ken Lowe, who is from a television background and steered the cable network strategy, will go with the new Scripps Networks.
The remaining Scripps newspapers – including the Rocky Mountain News in Denver, the Memphis Commercial Appeal, the Knoxville ( Tenn.) News Sentinel and the Ventura County ( Calif.) Star – will be under the direction of Lowe’s second-in-command, Rich Boehne. There has been little public discussion yet of strategy for the new company.
For the second time in two years, activist shareholders are challenging the management structure and strategy of the New York Times Company. There seems little likelihood that the Sulzberger family will yield voting control but the Harbinger group had assembled a 19% share of stock by the end of February 2008.8
Other 2007 transactions typically consisted of larger companies selling off smaller, profitable papers to the handful of companies still in an acquiring mode. The moves both raised some cash and allowed for focus on the bigger problems of bigger papers.
Among these, Copley sold all nine of its smaller papers, leaving just its flagship San Diego Union Tribune, Copley News Service and one small suburban paper.9 Morris Communications sold 17 papers distant from its Georgia base for $115 million, focusing on its papers in Savannah, Augusta and Jacksonville, Fla.10 Journal Register sold seven small papers in Massachusetts, leaving it with 22 papers, including the New Haven Register and clusters in upstate New York and suburban Philadelphia.11 The buyer in all three of these deals was GateHouse Media, based in upstate New York and still flush with proceeds from a successful 2006 initial public offering. The company, formed by venture capitalists from the private Liberty Group, now owns more than 100 dailies and numerous weeklies and shoppers.
Dow Jones sold six of the Ottaway papers for $250 million to Community Newspaper Holding, a low-profile Alabama-based chain that now owns dailies and weeklies in 200 communities.12 Funded mainly by public employee retirement funds in Alabama, Community Newspaper has a reputation for tight cost controls and operates only small and mid-sized papers.
As part of the Zell takeover, Tribune agreed to sell its two Connecticut papers, the Stamford Advocate and Greenwich Time. There was a tentative deal with Gannett, which fell through when unions would not agree to concessions. Hearst, the privately owned family company whose newspapers include the Houston Chronicle and San Francisco Chronicle, ended up the buyer in November.13
In early 2008, Dow Jones put the remaining 15 Ottaway papers for sale, since they are not a fit with Murdoch’s international media focus.14 (He did observe in an interview with the Journal in June that “those silly little Ottaway papers make more than the Journal.”15
Landmark Communications, controlled by the Batten family, announced in January 2008 that it had hired investment bankers and may sell all or part of the company.16 Like Scripps, Landmark is a collection of newspapers and television stations and a fabulous cable television network success – the Weather Channel, believed to be worth at least $4 billion by itself and sure to draw interest from bigger cable programmers.
The Battens have had an old-school commitment to news quality at their three biggest dailies – the Virginian-Pilot, the Roanoke ( Va.) Times and the Greensboro (N.C.) News and Record.
The Roanoke and Greensboro papers have also been noted for Internet innovation. Given the level of newsroom investment, any buyer might cut newsroom costs aggressively. The television evangelist and former presidential candidate Pat Robertson has expressed an interest in buying the Norfolk paper.
All things being equal, expect many publishers to be raising money in 2008 by selling some of their papers or exiting the field of battle entirely. One check on this activity, however, is that stock prices (typically set now by multiplying projected next year earnings by a 6 X multiple) have been hammered down.
Several companies have marked down the book value of papers they acquired by more than 50% (a requirement of accounting rules). Those reflect deteriorating earnings prospects and the much lower prices newspapers are fetching.
Another check on sales activity is that the pool of acquirers does not look deep. Dean Singleton’s Media News, typically a buyer, for example, did no deals in 2007 and seems focused on squeezing costs and developing Internet businesses at its existing properties.
The year also proved especially bumpy for non-traditional owners, who seemed just a year ago to be an emerging force in the industry. The Philadelphia Inquirer and Daily News, owned for 18 months by public relations executive Brian Tierney and a local investment group, has its editorial house in order and posted a daily circulation gain. But early in 2008, he announced that he needs to squeeze 10% more from the two papers’ expense base or risk default on bank payments.17
Avista Capital’s December 2006 acquisition of the Star Tribune of Minneapolis from McClatchy has also proved a series of misadventures. Avista hired Par Ridder, son of former Knight Ridder CEO Tony Ridder, as publisher, away from the rival Pioneer Press of St. Paul. Ridder decamped with confidential computer files and quickly tried to bring along some of his favorite executives in apparent violation of non-compete clauses. A messy lawsuit ensued and Ridder was force to leave.
In the wake of the debacle, Avista CEO Chris Harte, who hails from another newspaper family, installed himself as publisher. In January 2008, he wrote a memo to staff saying that classifieds had fallen 50% since 2000, cash flow had decreased 50% in just two years and another large revenue decline was budgeted for 2008. Harte also said that he was hiring a consulting firm that “specializes helping unions and management work together to improve performance.”18
There are still plenty of private venture capital funds flush with money and looking for companies to buy, so some may yet try their hand at the newspaper business challenge. However the Philadelphia and Minneapolis experiences mainly dash cold water on the notion that outsiders can bring some special operational magic that traditional publishers lack.
We foresee continued turbulence in ownership during 2008. Despite the activity of News Corp. and GateHouse, we would expect control to continue over all to shift from publicly traded to private, a trend we noted in last year’s edition that reverses the 40-year pattern of big fish swallowing smaller papers. Certainly the thrill is gone in the public companies’ relationship with Wall Street investors.
Wealthy individuals like Zell, some of them content to operate on a break-even basis, hover in the wings, and nonprofits are looking for ways to bolster professional newspaper journalism as it increasingly seems endangered. Wealthy California philanthropists have launched ProPublica, a nonprofit investigative service under the direction of former Wall Street Journal managing editor Paul Steiger. It will develop stories and offer them free or partner with existing news organizations (See News Investment section.)
However, 2007 was not a year that nonprofits stepped up to acquire newspapers, and various potential benevolent ownership models remain more a theoretical part of the industry’s future than a trend.
Marked-down prices for newspaper properties are going to look like even more of a clearance-sale bargain in 2008 if you are shopping with any other currency than the dollar. It also remains conjectural, though, whether international buyers will enter the fray.
1. Michael Oneal and Susan Chandler, “Boardroom Brawl Roils Tribune,” Chicago Tribune, June 15, 2007
2. Sarah Ellison and Jennifer S. Forsyth, “Zell Wins Tribune in Bid to Revive Media Empire,” Wall Street Journal, April 3, 2007.
3. Molly Selvin, “Challenge Authority If You Dare,” Los Angeles Times, February 5, 2008.
4. Richard Siklos and Andrew Ross Sorkin, “Murdoch Offers $5 Billion Bid for Dow Jones,” New York Times, August 2, 2007.
5. Emily Steel, “WSJ.com to Retain Subscription Component,” Wall Street Journal, January 25, 2008.
6. “Belo to Create Separate Television and Newspaper Businesses,” press release, October 1, 2007.
7. “Scripps Announces Plan to Separate Into Two Public Companies,” press release, October 16, 2007.
8. “Harbinger Raises New York Times Stake,” Associated Press via Boston Globe, February 25, 2008.
9. Dean Culbreath, “Nine Copley Papers in Ohio, Illinois, Sold for $350 Million,” San Diego Union Tribune,” March 14, 2007.
10. “Morris Sells News Chief, 16 Other Papers,” Polkonline.com., October 24, 2007.
11. “Journal Resister Agrees to Sell Massachusetts Newspapers,” Dec. 1, 2006.
12. Chris Tryhorn, “Dow Jones Signals Local Paper Sell Off,” The Guardian, November 28, 2007.
13. Reuters, “Hearst Buys Two Tribune Papers in Connecticut,” USA Today.com, October 25, 2007.
14. Chris Tryhorn, “Dow Jones Signals Local Paper Sell Off,” The Guardian, November 28, 2007.
15. Steve Secklow and Martin Peers, “Murdoch’s Role as Proprietor, Journalist and Plans for Dow Jones,” Wall Street Journal, June 6, 2007.
16. “Owner May Sell Weather Channel,” Associated Press via Yahoo.com, January 3, 2008.
17. ’Dire Situation’ In Philly – Tierney Promises 10 % Cuts at Two Dailies,” Editor and Publisher, January 23, 2008.
18. Jim Romenesko, “Taking Charge of Our Future,” (Harte memo) January 22, 2008.