The Popular Spin Is That Newspapers Are Still A Great Business, Just Not As Good As They Once Were. So How Come Moody’s Downgrades Dow Jones, and Puts New York Times and Tribune Under Credit Watch, and Knight-Ridder Sold for Basically No Premium?

The answer seems to be there is no end in site, and thus Moody’s, the credit rating service, sent tremors though the industry last week by downgrading Dow Jones, and putting the New York Times and Tribune on credit watch.

That’s all investors had to hear to send US newspaper shares to their lowest prices in years – the New York Times actually hit a near-eight-year low.

And the analysts who had been crying doom and gloom last year but who seemed to buck up a bit with the Knight-Ridder sale that indicated there might be financial life in newspapers yet, have now gone back to their old warnings.

Moody’s, in announcing its review of the Tribune’s debt rating, summed up the attitude of most analysts: “Fundamentals in the newspaper sector will remain weak in the foreseeable future. Of particular concern is the continuing downward trend in circulation and intensifying competition from online rivals.”

Moody’s has already struck at Dow Jones, publisher of the Wall Street Journal. While saying it still had a “stable” outlook for Dow Jones, Moody’s doesn’t like the fact that The Journal and its Market Watch financial Internet site that it bought last year for $520 million, are not performing up to par, and that the company’s increase in debt in the past three years has led to a sizable increase in leverage.

The dismal first quarter report from the New York Times seems to be a prime example of what is going on in the industry. Basically, the newspaper side is seeing next to no increase in revenues, but the Internet side is doing very nicely indeed.

The problem, of course, is that the Internet right now accounts for a very small proportion of overall company profits but the writing is certainly there for all to see – print revenues have basically no growth while the web continues getting stronger in each reporting period. But the web has a long way to go before it is a large enough part of the business to underwrite those print declines.

ftm background

Now That Knight-Ridder Is Officially For Sale, Two Questions Emerge: Who Would be Foolhardy Enough to Buy Newspapers These Days and Which Major Media Group Will Next Feel Shareholder Pressure To Sell Itself? - November 17, 2005
Knight-Ridder didn’t have much choice. With its three largest shareholders representing some 36% of the shares telling the company to explore ways of selling itself and threatening board changes if it didn’t, it hired Goldman Sachs to scout out the market.

Wall Street Says That Newspaper Industry Valuations Are Underperforming the Market. But Don’t Buy, It Says They’re Going Down Even More - June 20, 2005
Even though newspaper industry shares have underperformed the US markets by some 10%, looking like a buy bargain, Merrill Lynch has issued a report that says the shares basically have only one direction to travel and that’s down.

Warren Buffet Says the Newspaper Industry Is in Serious Trouble, He Thinks It Will Only Get Worse And He Sees No Solution. The Beginning of the End? - May 5, 2005
There are few American investors more respected than Warren Buffett, the world’s second most wealthy man behind Bill Gates.

Germany’s Privately-Held Bertelsmann, Now Virtually Debt-Free With 2 Billion Euros In Cash At the Ready - March 21, 2005
By any standard, the 2004 performance of the entire Bertelsmann Group – with major properties in Europe and the United States – would be the envy of any global media group. But with its RTL television group, Europe’s largest TV broadcaster, turning in profits dwarfing those of its other units there are indications that the company is returning to its European geographical roots.

Murdoch Takes a Pragmatic View of the European Media Scene: The Satellite TV Business is Good and Free Tabloids Hurt Paid-For Newspapers - February 6, 2005
Say whatever you like about Rupert Murdoch but one thing is clear – he understands the traditional newspaper/broadcast/satellite business better than anyone else, so when he passes judgment on the European media scene, as he has just done, media professionals should take note.

The Times owns the Boston Globe newspaper, one of America’s best. Advertising at that newspaper dropped 12% in February. There were some local reasons for that including department store consolidation that affected their advertising spend, but 12% in one month means it is more than that. There is a fundamental problem!

That took senior Times management to Boston for a look-see and the fear there is that management will announce more staff cutbacks. And that, of course, brings up the question of just how far can one cut and still maintain the quality product? That probably depends on the definition of “quality”.

The Times reported that about.com, which it acquired a year ago for $410 million is going gangbusters, up 75% over the previous year. Put that into perspective in the Times’ overall first quarter results and the total 3.7% increase in advertising revenue for the entire group is reduced to just 0.6% without about.com. Overall company revenue increased 3.4% in the quarter, but take out about.com and the increase is just 1.2%.

Internet ad revenue for the group – including its various newspaper web sites – increased 23.4% in February. It doesn’t take an MBA to figure out where the growth is – the question is whether that Internet revenue can be ramped up ever faster to replace the lack of growth in print?

Moody’s took a look at all that and, considering that the Times is carrying a huge debt load but seems not to be bringing in much additional cash flow to service it, said it was putting The Times’ A2 debt on warning for a possible downgrade.

Moody’s put the Tribune Group on credit watch for the similar reason -- it didn’t like the relationship between high debt and cash flow. One of the most respected media analysts on Wall Street, Paul Ginnocchio of Deutsche Bank, had been recommending his customers hold their Tribune shares, but with the Moody’s warning he jumped ship, recommending investors sell, saying he thought that cash flow for the rest of the year was likely only to get worse.

What has been a major problem to both groups is that they have been trying to get their share price up – without success – via very large share buybacks on borrowed money. The time to pay the piper has come.

Knight-Ridder, of course, tried the same tactic of buying back shares, but it did little good. Now that the group has been sold to McClatchy for $67.25 a share the McClatchy ceo has written in the Wall Street Journal that no one would have believed a few years ago that a group like Knight-Ridder could have been bought for basically no premium to market.

Knight-Ridder’s largest investor – Private Capital Management – urged a sale of Knight-Ridder (K-R) after its shares languished in the low 50s.That alone put the shares into the low 60s. PCM had paid on average around $65 a share for its K-R holdings, so getting out at $67.25 at least avoided a loss, but not much profit for a long-term investment.

PCM is probably still the largest US investor in newspaper shares, but it knows it cannot force sales at other properties because the owning families control the voting shares – a major mistake of the Knight and Ridder families when they went public that they did not establish the separation of voting shares vis a vis general shares.

But reviewing that PCM/K-R experience, and what it took of PCM to at least get out with what its ceo called a single rather than a home run, and now with Moody’s warning that with three of the largest US newspaper groups that it is unhappy with cash flow vs. debt, why would anyone risk further investment in newspaper shares?