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December 8, 2008

Rocky for Sale

As by now everyone know, the Rocky Mountain News has been put on the block.  This at a time when the Tribune Company has filed for Chapter 11, when over 30 papers are for sale nationwide, and there don't seem to be any buyers for large-market papers.  The business reasons for this have been chewed over ad infinitum, but the chief culprit is declining ad revenue, which only looks to get worse.  (I'd also suggest brand equity; the Rocky used to win the lion's share of the journalism awards, but the Post had a better brand, in part because broadsheets seem to carry greater credibility.)

Editorially, this is an opportunity.  It's an opportunity for center-right bloggers, who will now be able to go after the Post as it inevitably spins off to the left, becoming our version of the Strib.  It's an opportunity for us to do more original reporting, since it's possible the Rocky won't be there to do it.

It may be a big opportunity for the Examiner, which may try to pick up some of the loose talent soon to be running around Denver looking for work.  The online paper is based here in town, and could rapidly turn its local edition into the flagship for the country.

It's also an opportunity for the talent at the Rocky, who could try the same thing on their own.  Shed the national reporting, bring in some entrepreneurial-minded management, ditch the printing presses and expensive delivery system, and turn the paper into an online, state- and local-oriented newspaper.  Charge a nominal fee for a subscription, and go back to a no-holds-barred style, that takes on the Post directly.

November 28, 2008

Newspaper Finance - II

The Balance Sheet

Put simply, American newspaper companies have too much debt, and have been fooling themsevles about how much equity they have. When they went through that period of consolidation a few years back, the surviving (so far) companies vastly overpaid for the properties they bought, thinking that either they could turn them around or that the names would translate into sales. Then they borrowed agains these "assets," and have thus robbed themselves of whatever flexibility they had.

Here are the assets of the seven companies we've been looking at so far:

The bars represent the total assets. The blue represents something called, "Goodwill," the red, everything else. Goodwill is, roughly speaking, the vigorish that you pay for a company. Essentially, according to accounting rules, you're not allowed to pay more for something than it's worth. What you pay for it is what it's worth. So if you pay $4 million for a company whose net assets are valued at $3 million, after the buyout you put down the extra $1 million as an asset called, "Goodwill." It can generously be interpreted as extra cash you think the property should generate over time.

But it's a guess, an estimation, and can also serve as a slush line item to hide the fact that you just overpaid by 50% for a name that isn't generating any ad revenue any more, but that People Trust. It used to be that Goodwill was amortized over a period of time. Now, it has to be re-examined as often as necessary, and written down as appropriate.

Let's take a look at what's going to happen, as accountants realize that if the New York Times can't sell ad space, neither will the Podunk Press they sunk $2.5 extra large into five years ago, and that all the Goodwill in the world isn't going to change the fact that Iowans are getting their news from here and their local advertising from here.

The other rule here, so basic it's been known since the Italian Renaissance as the Accounting Rule is that Assets = Liabilities + Equity. If I write down an asset, I also need to subtract a like amount from either liabilities or equity. Since Goodwill isn't exactly a loan, likely it'll come out of equity. Here are the Owners' Equity lines from these companies, before and after Goodwill is subtracted:

That's right, boys and girls. Four of these Titans of Type go from having positive equity to negative equity, meaning they owe more than their companies are worth. And this is a completely defensible assessment. Given the current market, and the likelihood of how these will develop, you can't sell that Goodwill on the open market, because people apparently have resorted to paying what things are worth.

Now all of these companies have some long-term debt, although the Washington Post company seems to have made an effort to pay its down to minimal levels. Typically, I don't want debt-to-equity to be more than about 1. I know, there was a time not so very long ago when investors liked leverage. Because after all, we'd always be able to refinance that, wouldn't we? But I was never comfortable with huge debt-equity ratios.

Naturally, the D-E are calculating including Goodwill. Here's what happens when you subtract the Goodwill from the equity, and recalculate:

Not much fun. Of course, four of them go from positive to negative, including USA Today, which looked safe. The Journal newspapers only edge up to 1.30, and the NY Times - whoa, there, Pinch! - run up from a safe-looking 0.75 to almost 3.2. Only the Washington Post manages to stay sober.

These companies have been fooling themselves about the state of their balance sheets, believing that they had better balance than they did, because they were counting on revenues that will never materialize.

Now, I know what you're thinking. Debt's ok if you can pay it. Well, as we'll see next time, that's a problem, too.

November 17, 2008

Newspapers - The Financial Crisis - I

A lot of pixels have been spilt over the financial crisis that newspapers are now facing. Some of it has been triumphalist, some of it more in sadness than in anger (or joy).

Now, as Ecclesiastes says, there's, "a time to destroy, a time to gloat." OK, I made that part up. But the fact is that while new media may create the buzz, most issues are still ultimately validated by appearing in the MSM. Their brand-name appeal still carries a lot of weight, as demonstrated by their post-2004 counterattack against blogs. And the fact that their corrections sections pages compete only with their apologists ombudsmen in after-the-fact self-justification hasn't yet succeeded in destroying that brand-name.

So the financial condition of newspapers should still be of interest to us all. (They are, it would seem, at least of passing interest to their publishers. Although not of enough interest for the publishers to pay for the conference themselves. "The summit conference was enabled by a generous grant from the McCormick Foundation and funded by API's J. Montgomery Curtis Memorial Seminar Fund.")

Some of the gloating has come from talk radio and the right, on the assumption that the MSM's credibility gap is causing its financial difficulties. Maybe. But as one of the participants put it, "'We don't have a crisis of audience. We have a crisis of revenue' in monetizing that traffic."

Over the course of a series of articles, I'm going to look at the industry's financials, learning and revising as I go, trying to understand and explain what's happening to the newspaper industry, and why it's producing stock charts that look like the pre-Fed Bear Stearns:








  booklist

Power, Faith, and Fantasy


Six Days of War


An Army of Davids


Learning to Read Midrash


Size Matters


Deals From Hell


A War Like No Other


Winning


A Civil War


Supreme Command


The (Mis)Behavior of Markets


The Wisdom of Crowds


Inventing Money


When Genius Failed


Blink: The Power of Thinking Without Thinking


Back in Action : An American Soldier's Story of Courage, Faith and Fortitude


How Would You Move Mt. Fuji?


Good to Great


Built to Last


Financial Fine Print


The Day the Universe Changed


Blog


The Multiple Identities of the Middle-East


The Case for Democracy


A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam


The Italians


Zakhor: Jewish History and Jewish Memory


Beyond the Verse: Talmudic Readings and Lectures


Reading Levinas/Reading Talmud