Will Newspaper Groups Follow The Banks In Taking Asian And Middle East Cash for Equity? Actually, A Major Regional British Newspaper Group Already Has

Philip Stone May 15, 2008

It’s no secret that some US and European banks were soaked in the US sub-prime credit crunch mess and gave up equity stakes in return for huge cash inflows from Asia and The Middle East. It’s no secret, too, that newspapers are suffering major advertising revenue declines and for some that means making debt repayments might be in jeopardy, so can Asian and Middle East money be a savior there, too. Yes, according to the UK’s Johnston Press that has made such a deal.

Johnston Press, publisher of more than 300 UK regional and local newspapers, has agreed to accept £42.7 million ($$83.25 million, €53.6 million) for 20% of the company from Ananda Krisnan, said to be Malaysia’s second richest billionaire and rated the world’s 116th richest man according to Forbes Magazine’s rich list. The deal is via his Usaha Targas investment company that specializes in media and communications sectors.

In addition Johnston Press is raising another £169.6 million ($330 million, €212 million) via a one-for-one rights issue discounted 61% from the share price the day before the announcement. The City (the UK’s Wall Street) didn’t like the deal one bit and the shares sank 15.10% on the day to 115.25 pence, the lowest they have been in some 12 years. At one point during Wednesday’s trading they hit a low of 109 pence, a 20% fall, before rebounding back a bit. The rights issue is priced at 53 pence.

Obviously, the Malaysian investment is not on the same scale as the billions being pumped into US and European banks by Middle East and Asian Funds – some private money, others from state-owned sovereign funds – but the concept is pretty much the same. If you need money to boost the balance sheet these days it’s in Asia and the Middle East where the “readies” are abundantly available.

At least Johnston Press is still listed on the London stock exchange. Take a look at the Journal Register Company  that has been delisted from the New York Stock Exchange and its shares over the counter on Wednesday dropped 15% -- that’s three cents – to 17 cents each.

A US investor, Richard Barone, chairman of Ancora Capital Inc, a Cleveland-based investment firm that already owns some 5% of the Journal  Register,  said Wednesday he was willing to put $25 million into the company – for a significant equity stake --  assuming the banks will renegotiate debt payments due July 23. The company had previously said it is in risk of not being able to make those payments and if that happens the next step could well be bankruptcy unless the banks agree to delays.

Journal Register  owns 22 daily newspapers with a total daily circulation of about 559,000. The company also owns 346 non-dailies with a total distribution of more than 6 million. It also carries some $642 million in debt. Barone’s plan, if he got a majority stake, would be to sell off at least half of the company.

Think of it --  control of a newspaper group like that for just $25 million – that’s just pocket money, not even petty cash, for those Middle East and Asian investors. True, they would need to be sold that print is just going through an economic downturn and when the economy comes back so will print, and meanwhile the digital business is booming.  

Also Americans didn’t take very quickly to Australian Rupert Murdoch owning newspapers there in the 1980s, they still don’t like the Korean ownership of the Washington Times, so there may be some hassle for Asian or Middle East money invested in the Fourth Estate, but frankly beggars cannot be choosers and if it is good enough for the banks then why not newspapers that are up to their necks in debt to those very banks.

And then there is the Sun-Times Group  – think Hollinger, think Conrad Black – and its shares were suspended Wednesday before the New York Stock Exchange opening with a closing price the day before of 34 cents and a market capitalization of $27 million. Again, pocket money to the Asian and Middle East money people.

The point is that with newspaper company valuations so low newspapers could indeed be good-looking investments for foreign money that is willing to take a long-term view. Politically there would be a hue and cry but the Bush Administration has already gone on record that it welcomes the foreign investment in the banks so if someone can convince the foreigners that the US newspaper business is a good business to be in then there are deals aplenty just waiting for those buyers.

As for Johnston Press, dissect what is happening there and it’s the same old story of print advertising revenues falling far short of expectations  for the first four months of the year – auto classifieds down 16.4%, real estate down 12.1%, and jobs down 5.3% -- although the digital properties reported a 56% revenue increase over the same  period a year ago. The company is considered to be well run although eyebrows were raised  in March when, in a falling revenue environment  and heavy cost controls, three senior executives were awarded bonuses double that of the year before. 

The  company carries a heavy debt load and while it may not be in danger today of missing a payment, it was a noose around the neck if revenues continued to decline. Management obviously believed the situation dire enough to raise new money, and a one-to-one rights issue at a 61% discount sounds pretty desperate.

A Johnston statement made clear that because of the tightness in the credit markets and if advertising revenue was to decline further then there could have been a danger of breaching its debt covenants. 

It’s a perfect example of what is happening at so many newspapers in the so-called developed world -- their digital operations are roaring along with vastly higher revenues but  not high enough to offset the fall in print revenues which in turn puts debt payments in jeopardy (think that could even happen to Tribune if there are not more disposals in addition to the Chicago Cubs, Wriglewy Field, and Newsday). 

And that makes newspapers vulnerable to new ownership at really low fire sale prices. But if the banks don’t co-operate in renegotiating the debt covenants then reporters may well find themselves in bankruptcy court covering the proceedings of their own newspaper.