Baseball and Newspapers No Longer A Mix

Philip M. Stone January 29, 2009

Tribune has agreed to sell its Chicago Cubs baseball franchise for a much needed $900 million – if the buyers, the billionaire Ricketts family, have trouble raising the cash maybe Carlos Slim could come through with a 14% loan -- and The New York Times Company says it is flogging its 18% interest in a New England sports venture that includes the Boston Red Sox baseball team.

So much for the past strategy for media and sports synergy! Today it’s all about protecting the core business, dumping anything that isn’t considered “core.” 

When Tribune filed for Chapter 11 bankruptcy late last year, owner Sam Zell specifically kept  the Cubs, the team’s Wrigley Field and the 25% stake in the ComcastSportsNet Chicago, out of the proceedings, but even so the bankruptcy judge gets to rule on whether the sale is a good deal for the creditors. Before the credit crunch came along there was talk of the Cubs being worth up to $1 billion, but in this day of tight credit $900 million is none too shabby if the deal gets completed.

What’s going to be real interesting is the tax angle – Zell has a passion for taking advantage of every tax loophole known to his well-paid accountants so a straight sale of the team and assets with the associated huge capital gains hit is unlikely. He saved some $200 million in taxes last year on his $630 million deal offloading  Newsday by holding onto a 5% share so the deal went down as a joint venture rather than a sale – the same format for the Cubs?

For tax reasons Zell had tried to get the state of Illinois to take over Wrigley Field but after months of negotiations nothing came of it – wasted time that Zell probably would  love to have back. And then there is the federal government’s pursuit of Illinois Governor on a variety of allegations among them that he was pressuring Tribune to fire the Chicago Tribune’s hostile editorial board, especially writer John McCormick, in exchange for a Wrigley Field tax deal worth $100 million to Tribune.  Whether Zell turned the deal down or the feds got involved before any deal could be done has never really been explained, but at the end of the day there was no such deal, the editorial board remained intact, and Zell had to find another way to offload his baseball holdings.

Now along comes the New York Times Company saying it needs to protect its core assets and get rid of extraneous properties so it has hired Goldman Sachs to flog the NYT’s 18% of New England Sports Ventures which includes the Red Sox baseball team, its Fenway Park Stadium, and a stake in the regional sports network.

That all could be worth around $150 million, based on what Tribune is supposed to get for the Cubs, but it might come in lower because here it is a minority stake being sold and when people pay big money they like to have control.

At the Times there certainly seems to be an feeling of some desperation – there is the Carlos Slim $250 million loan at 14% interest; there is the sale leaseback of its new office building which is supposed to bring in some $225 million; the pension fund is underfunded by $625 million so the company needs to clean up its financial act in 2009 so it can start making some major pension contributions next year; it has severely cut its dividend; it has written down $19.2 million on the value of the International Herald Tribune; its Q4 net income fell 48% from a year earlier; Christmas was really rotten with December ad revenue down 16% from a year ago including classifieds down  29%; and to top it off even revenue at its about.com dropped 2.9% because of a fall-off in display advertising. With all of this can The Times avoid another newsroom cull this year?

Any good news? Well, for all the poor financial numbers the company actually did a bit better than analysts had expected so the shares rose Wednesday by 5.9% but that took them to just $5.91.  Circulation revenue rose 3.7% -- the newspaper has been steadily increasing its newsstand and subscription prices and apparently not losing too many readers is doing so. 

President and CEO Janet Robinson was very forthright in describing how bad conditions have gotten. “As the economy deteriorated in the fourth quarter, advertisers significantly reduced their spending,” she said in a statement. “After growing almost 15% in the first nine months of last year, digital advertising decreased 3.5% in the fourth quarter as online marketers cut back on display ads in response to worsening business conditions….

“As we look ahead, we believe advertisers will continue to be cautious with their budgets, particularly in the early part of the year. To date in January the rate of decline in print advertising revenues has accelerated from what we saw in December, while that of digital is similar to last month.”

Unfortunately the McClatchy Company doesn’t have any baseball teams to sell to try and protect its core, and only, business – newspapers. So it announced Wednesday that its next dividend, payable April 1, will be its last for the foreseeable future. The company last Fall had cut the dividend by half to 9 cents a share and it also went cap in hand to its lenders because it was in danger of violating loan covenants. Those lenders played hardball (there’s the baseball analogy!) getting a 0.25% interest increase on the loans that will cost McClatchy an additional $2.8 million a year while also reducing its line of credit under certain circumstances, and placing severe limits on dividend payments. 

The leverage ratio of debts to cash flow had originally has a 4.5 limit, but under the new agreement the ratio was increased to 6.25. The announcement now that the April dividend payment will be the last indicates that 6.25 figure is being/has been approached with debt costs up and cash flow down. The company is said to be shopping its Miami Herald (it refuses to comment on that) and it is desperately trying to sell real estate and buildings around the country.

Can you believe that on March 10, 2006, the day McClatchy announced it was buying the Knight Ridder chain, its shares stood at $54.24, and Wednesday they closed at 84 cents – yes, less than $1. How the mighty are falling!