The current financial crisis only rubs salt into the wounds of the newspaper industry. Already hemorrhaging advertising linage and revenue (The Philadelphia Inquirer is reduced to putting car dealer display ads in the main news section where attractive full pages of department store ads used to be), a recession would further erode advertising. But now comes a credit and liquidity crunch that could affect newspapers companies carrying high debt loads, especially if the debt needs to be refinanced in the near term.
The “Heard on the Street” column of The Wall Street Journal last Friday noted that “Of the U.S. media companies whose debt is rated by Standard & Poor's ... 86% are speculative-grade, a higher percentage than any other industry.” Those companies planning to pay down debt through asset sales, such as The Tribune Co., may find that potential acquirers will have less access to financing. With $12 billion in debt, it was expected to pay some of that down through the sale of the Chicago Cubs. But that is not a done deal.
McClatchy Balance Statement
For example, McClatchy, the third largest newspaper publisher, is laden with debt from its 2006 acquisition of Knight Ridder. Its long term debt is still 10 times higher than pre-Knight Ridder even after using proceeds from sales of some newspapers to pay down debt. At the end of June, McClatchy had $1 billion in revolving and term bank notes loans as well as $50 million in public debt that will come due in 2009.
Its Long Term Debt to Equity is 5.8, up from 0.1 in 2005. And its stockholders equity is down 72% from its 2005 level. All this gives the owner of the Miami Herald and Raleigh News & Observer little wiggle room for raising additional capital. This crunch is reflected in its recent dividend announcement, cutting in half its dividend to conserve cash. That step is in addition to a 10% reduction in its workforce.
Holding higher relative amounts of debt is called “leverage” in the financial world. Used judiciously, leverage can help an enterprise grow without diluting the holdings of the owners. But when access to debt is too cheap and easy, it can also lead to making poor strategic decisions. And once laden with debt, it restricts further flexibility when, as now, credit comes with more strings and tighter knots.
With the decline in advertising and circulation, restrictive and more expensive credit may only accelerate the slide for some media companies.
COMMENTS
1. BETTY H on September 22, 2008 8:40 AM writes...
The model of the Newspaper Conglomerate (excluding specialty papers-W.SJ., IBD, BARRONS) cannot continue; especially in leveraged form.The following factors: raw material inputs, energy, organizational structure, and dependence on low compensated "independent contractor" home delivery carrier distribution systems, threats from lawsuits and government actions regarding independent contractors (see P.C.F.), represent long-term fatal flaws in model.
