Al Neuharth Reminds Everyone That Newspaper Margins Are Better Than Most Businesses, But Take A Look At What Print Is Having To Do

Philip M. Stone May 27, 2008

USA Today founder Al Neuharth reminds everyone in his column that the newspaper business is still a good business – “Sure, the slumping economy has made times a little tough for them, but most still have profit margins well above most other businesses,” but it’s worth taking a look at what those businesses are up to these days to maintain those margins.

McClatchy, for instance, is leaving few stones unturned to move out of quarterly losses because of burgeoning debt payments, so one of its more ingenious moves was to use cheap money to buy back some $300 million worth of high-cost debt at a discount.

McClatchy, whose debt is rated deep into junk territory, drew down its bank credit at 4.9% interest, to buy back the bonds on which it had been paying mostly from 7% to near 10% interest.  So, that’s a neat  interest cost reduction right there and because the bonds are seriously  “junk” and with McClatchy shares dangerously low at just $9.02  the company saw it could buy back its bonds at a good discount to face value.

No wonder that Pat Talamantes, McClatchy's chief financial officer gushed, "We are pleased with the results of the tender offer. The oversubscription to the offer is clearly a reflection of a win-win transaction for the company and its bond holders. We were able to reduce debt by $17.5 million and lower our ongoing interest costs, and expect to record a $19.5 million pre-tax gain on the extinguishment of this debt. We will continue to focus on debt reduction and expect debt to be in the $2 billion range by the end of 2008."

McClatchy actually did a bit better than expected since it had originally announced it was buying back $250 million worth of bonds, but with “junk” being “junk” the holders offered up some $350 million so McClatchy increased the buyout to $300 million.

McClatchy is also selling real estate. In Ft. Worth, Texas, for instance the Star-Telegram announced it is selling its annex building that houses its classified-advertising operations, the features copy desk and the credit union, and it will move those 100 employees into its main building. Also getting the “for sale” sign are three parking lots.

Chet Wakefield, Operations senior VP, told his own newspaper, “We’re trying to get more efficient in our operations. We pay quite a lot to maintain the annex building. It is our intent to sell it.”

Billionaire Tribune owner Sam Zell, 66, who sold Equity Office Properties Trust, the largest owner of U.S. office buildings, for $39 billion including debt in February 2007, five months before the credit crunch, has been busy on Tribune’s property side. He may not have much experience running newspapers, but he knows more than just about anyone how to make tax effective real estate deals.

Tribune has paid $175 million for the Chandler-owned newspaper facilities that they held onto after the merger of Times Mirror into Tribune in 2000 including  the downtown home of The Los Angeles Times  and other properties used by the Baltimore Sun, the Hartford Courant and Newsday.

Zell, the king of making tax efficient deals – his Newsday joint venture deal saved him some $200 million in taxes -- used proceeds from the sale of Tribune Studios in Hollywood last month and additional property in Stamford and Greenwich, Connecticut to buy the Chandler properties, and since the transaction is considered a like-kind property exchange, federal capital gains taxes are deferred. The deal eliminates $24 million in annual lease payments.

The most tried and tested way of reducing costs is, of course, to reduce headcount, and newspapers, from the very famous to the not so famous, are busy doing exactly that. The Washington Post has announced that more than 100 reporters, editors, photographers, artists and other journalists have accepted generous buyout offers that were offered to staff over the age of 50 with more than five years experience.

The Post said it had “about 780 full time-equivalent newsroom workers”, and that some 230 employees were eligible for the buyout – equal to about 30% of the editorial staff. That means a very substantial part of that newsroom was high salary and the trend in buyouts nationwide these days is to be rid of the highest paid employees (no last in, first out).

When an employee starts to earn “real money” from being on the job for many years then companies seemingly are deciding that while experience is good and helpful those senior employees aren’t worth the money and either eliminate that cost or replace it at far less, albeit with far less experience. After the buyout the newsroom will be “about 700”, The Post says, and it is “reorganizing” although it promises that sections will not be eliminated.

Even The New York Times has resorted to layoffs. It wanted 100 gone, didn’t get enough voluntarily, and thus 15 were given their marching orders in the newspaper’s  first-ever mass firing of journalists, according to the New York Post (The Times says it won’t give information on numbers laid off.)

Gannett, the largest US newspaper publisher, says it is looking for 160 layoffs at five of its New Jersey newspapers. And elsewhere it is also playing hardball in labor negotiations. Thus its Honolulu Advertiser, Hawaii’s largest circulation newspaper, is offering employees a three-year wage freeze plus they will have to double their contribution towards the company’s medical insurance premiums. That negotiation has now gone to mediation.

For all of that, Jim Cramer, one of the most influential of US television financial advisers, is no fan of print – he’s a media bear and an energy bull. He told The Hollywood Reporter, “Since Rupert Murdoch got in it takes me 15 minutes extra each day to read the (Wall Street) Journal because it’s so much better. Murdoch made it great, but that doesn’t mean it’s good for the stock.”

So, there’s Al Neuharth  who quotes Mark Twain that “The report of my death is an exaggeration” as his way of saying that newspapers are still alive and kicking,  whereas Jim Cramer says at the very least that newspapers are not a growing business and he doesn’t see that they will be again. Neuharth is definitely right, Cramer may be right, and there can be no doubt that newspapers are undergoing dramatic change in the way they operate.

At the end of the day it’s not just about maintaining margins, it’s about trying to maintain print newspapers, at least in a form we still recognize.