Cablevision’s Newsday Win Means Zell’s Newspaper Outlook Is Truly Bleak And More Cold Cash In The Bank Now Overweighs A Later Good Long-Term News Corp Working Relationship

Philip Stone May 13, 2008

The spin on Tribune’s sale of Newsday to Cablevision for some $32 Million more than Rupert Murdoch offered is what a fantastic negotiator Sam Zell is and how he fooled Murdoch into thinking the newspaper was his when in fact he was being used to get Cablevision to offer more. The truth more likely is that Zell really wanted to sell to Murdoch and establish a good long-term News Corp working relationship, but Tribune newspaper cash flow is falling so rapidly, the outlook is even more bleak than current results, so Zell cannot afford the luxury of leaving money on the table – he needs every penny he can get for big debt payments due this year and next.

Murdoch certainly thought last week that Newsday was his within a couple of days, telling reporters Sam Zell was a man of his word although he admitted the next day that he may have over spoken on the issue. Come the weekend and News Corp. was out.

Say what you will of Murdoch but he is no fool. When he bid $5 billion for Dow Jones everyone thought he was crazy to offer a 60% premium and competitors who did the math to see if they could beat his bid came up short. Some say there was a lot of vanity in that bid, but he is a businessman, he is used to paying what at the time seems like a too-high premium for what he wants and usually at the end of the day everyone marvels at how smart he was. The jury will remain out on Dow Jones as a financial investment for some time to come.

Murdoch could have increased his $580 million bid for Newsday but chose not to. It’s possible he thought he had Zell’s word on the price and when Zell asked for a Cablevision match it was walk-away time, but the likelihood is that Murdoch understood Newsday’s financial position real well, he had built into his bid that he could later save some $100 million by combining some non-editorial operations at the Wall Street Journal, New York Post and Newsday, and money has not been an obstacle for what he and/or his money people tell him is a good deal. But his money people probably told him he had a hefty premium built into his bid already, and Newsday’s outlook for the rest of the year was looking decidedly iffy.  

Tribune newspapers do not break out the performances of individual newspapers but the publishing group Q1 numbers were pretty awful –revenue down 11% from a year earlier and there is no one out there daring to say they see any improvement in Q2 or beyond. Zell himself stated that “print ad revenues continue to be challenged by the weak economy’s impact on real estate and classified advertising.”

Now, that’s a real problem. Zell believed when he took Tribune private in a $8.2 billion highly-leveraged deal that he could count on the 11 newspaper cash cows to provide much of the necessaries  to cover debt, but no sooner is the deal done than what were already reduced newspaper revenues went from bad to just plain awful when compared to what had been expected.

That’s not to say the newspapers aren’t making money – Newsday is said to have made close to $90 million last year – but that Q1 revenue drop for the publishing group translates into $103 million less than the same period the year before, and that was $103 million that Zell was counting on. And expenses in the quarter were just about flat compared to the year before – they may have fired a lot of people but the severance payments are having their effect on the immediate bottom line.

Tribune is carrying a total debt load of near $13 billion – remember the massive share buyback before Zell’s takeover -- and this year and next Zell needs to come up with $1.85 billion in debt payments. With newspaper revenue dropping so precipitously Zell had to quickly backtrack on plans not to sell newspaper or broadcast properties and so a newspaper had to go. Which one in an environment where newspaper valuations are going down, down, down? 

Newsday was a natural – not as big as the Chicago or Los Angeles newspapers but still with the 11th largest circulation in the US in the nation’s top media market. There was a possibility of a high-priced auction if Murdoch and Mort Zuckerman, owner of the New York Daily News, got into a bidding war. Murdoch saw synergies if he could combine non-editorial operations with his two New York-based newspapers, Zuckerman would bid to stop Murdoch getting a solution for his $50 million annual losses at the Post, and then who knows who else might come out of the woodwork – and out came Cablevision.

Zell, a master at taking advantages of tax law, wanted a joint venture in which he would continue to own a very small minority of the newspaper, but that would avoid some $200 million in tax if he had sold the paper and its property outright. Murdoch obligingly formulated such a deal, took into account his synergy savings, and bid $580 million and he thought he had a hand-shake deal. Zuckerman then came in with the same bid, figuring he was in a stronger position because Murdoch might have regulatory approval problems because of his New York-based print and broadcast holdings, but then Cablevision, after at first saying it wasn’t interested, then came in with a winning bid of $612 million in cash plus an $18 million prepaid rent payment (Zell keeps the property). Murdoch refused to match or beat it.

Now maybe Zell just used Murdoch and Murdoch misread the situation, but all of the vibes beforehand had been that Zell wanted to form a good relationship with Murdoch because he wanted to get print deals for the Los Angeles Times and a Florida newspaper to print the Wall Street Journal that is distributed in those territories. But that is a relationship for the future whereas Zell’s financial need is now.

With Q1 newspaper revenue down $103 million and Q2 likely to be even worse Zell just has to grab every penny put on the table now and with prepaid rent thrown into the deal that’s $50 million more than News Corp’s bid. So given the choice of cash now or build a relationship for long-term revenues, now won out.

Assuming Murdoch was not piqued at being used and he made his decision not to bid more on purely financial reasoning then Cablevision has way overpaid. It has offered all sorts of good reasons why the deal makes sense – it already provides television, Internet and telephone services in New York, New Jersey and Connecticut, plus 24-hour local news and it believes with cross-selling, using Newsday’s editorial copy for the local news station and all sorts of similar reasons that it has struck a good deal. Very doubtful reasoning and just as Murdoch was accused of a vanity bid for Dow Jones so , too, it looks like Cablevision’s controlling Dolan family may have done the same for Newsday. The difference is that Murdoch knows how to run newspapers and the Dolans don’t.

What would be funny if it was not so tragic is that some Newsday staffers and union representatives say they are pleased to be out from under Tribune. This may well be a case of better the Devil you know…

It should not be lost on Newsday employees that Cablevision has borrowed all the money – some $650 million from Bank of America – to make its purchase. That debt is going to have to be paid off and it doesn’t take a genius to figure out that if Newsday employees were worried about Tribune layoffs just wait until Cablevision sees what it has to do to handle that new debt.  If debt repayment has to come out of Newsday coffers with no help from the massive cable business then it is not going to be “Happy Days” for Newsday staff once the deal is closed.

And while Newsday’s approximate 17% profit margins are still pretty decent, cable is more used to margins in the 30 percentile so will the company treat a newspaper differently or will it be what’s good for cable is good for the newspaper, too?

Zell got close to seven times annual cash flow for Newsday which isn’t bad in this day and age – five years ago it would have been more than 10 times – and he has done better than he had the right to hope.

So, was it smart Zell salesmanship with Murdoch completely misreading what was going on, or did Zell get lucky and he found the sucker in Cablevision  with a bid that was simply too good to pass up? It’s probably some combination, but when all is said and done will Zell have raised enough money from Newsday plus the expected sale revenues from the Chicago Cubs and Wrigley Field plus cash flow to meet those debt payments, or will another newspaper or broadcast property need to go, too?

Q1 broadcast revenue was up slightly and with the Olympics and the elections coming up this should be a banner year for the broadcast division. But newspaper revenue seems almost in freefall and it is that uncertainty of when/if things will turn around that will determine if Zell can hold on to all 10 of the remaining print properties.