McClatchy (NYSE: MNI) is the third largest newspaper chain in the U.S. It is also in debt up to its eyeballs from its purchase of Knight-Ridder. Its only chance of paying that debt is to get operating income up. Because of the bad advertising environment, that has not worked out.
Things have gotten so bad that McClatchy may default on its debt and creditors may end up owning and operating the company. Investment bankers running printing presses -- nice picture.
In the last quarter, reported Tuesday, revenue at MNI dropped $100 million to $451 million. Operating income was only $40 million against debt service of $34 million. The margin for error is gone. In September, ad revenue dropped 20%, so the fourth quarter could be McClatchy's last as an independent company.
Banks that have loaned money to newspaper chains are in a bind. They can seize assets and hope to sell them to cover debt, but with the industry environment so bad, the chance of them getting their money back is slim.
The other option may be the more intelligent one. Alter loan deals to stretch out payments, take 100% of operating income to cover debt and hope that newspaper recover, even a little. That option beats selling assets in a market that does not want them.
Douglas A. McIntyre is an editor at 247wallst.com.
Many of the large newspaper chain purchases over the last several years have involved tremendous borrowing and the banks are at the door with eviction notices. Even the big companies in the industry are having trouble. According toThe Wall Street Journal, Gannett, Inc. (NYSE:GCI) the country's largest newspaper publisher, said Wednesday it had tapped its credit line as short-term financing markets stall.
Several other chains, particularly McClatchy (NYSE:MNI) and Gatehouse (NYSE:GHS) are having crippling debt problems.
A number of media sources reported yesterday that the The Star Tribune in Minneapolis has missed a payment on its debt.
Although it is hard to imagine, some of these companies may fail and fail soon. The costs of newsprint, trucks, gas, and personnel are so great that a number of newspapers may complete shut down. Customers may wake up one morning and find the front step empty. The poor newspaper boy has lost his job.
It is a hard time when there is nothing to put in the bird cage.
Douglas A. McIntyre is an editor at 247wallst.com.
Within the past years, several public newspaper companies have been pushed to the cliff of insolvency. They have taken on too much debt and the downturn in advertising has put them in a position where they cannot cover interest payments.
Journal Register was knocked off The New York Stock Exchange and is in the process of liquidation. The value of its properties has dropped so low that its common shareholders will get nothing and creditors will not recover the amount of their loans. Gatehouse Media (NYSE: GHS) has traded under $1 for weeks and also face delisting. Odds are that its properties will have to be auctioned off.
Banks may be employing a new tactic in the hope of getting their money out of the newspaper industry. Extend loans, let the companies cut expenses to the bone, and pray that advertising will get better. If it does, they might get their money back. McClatchy (NYSE: MNI), the nation's third largest chain, was the next company in the industry to head toward liquidation. Based on a new lifeline from its creditors, it may dodge that for awhile. According to The Wall Street Journal (subscription required), "The publisher of the Sacramento Bee and Miami Herald said Friday its banks agreed to loosen restrictions on the company's level of debt compared to cash flow, and its ratio of interest payments to cash flow."
The banks are making a big mistake. McClatchy's has many of its properties in California and Florida were the economies could be troubled for years. By letting McClatchy stay in business, the banks are risking that the value of the company's papers will drop even more. If McClatchy is sold off in pieces now, creditors might get most of their money back.
The holders of McClatchy's debt may have saved the company, for a few months at least. They have also put themselves in a position to lose most of their money.
Douglas A. McIntyre is an editor at 247wallst.com.
Newspaper chain Journal Register has been delisted from The New York Stock Exchange and will sell off its assets. That was an early sign that the U.S. newspaper industry was in extreme trouble.
On Tuesday, there were signs that newspapers are not just in decline. Many of the largest papers may simply fail over the next year. Huge newspaper group, McClatchy (NYSE: MNI), which bought the Knight-Ridder chain, said ad revenue was down nearly 18% in August and that it would cut 10% of its work force, about 1,200 people. McClatchy has over $2 billion in debt and it is becoming clear it will not be able to pay that off. In other words, the company is close to being insolvent and will probably end up auctioning off its properties.
If McClatchy does begin a liquidation, dozens of newspapers will be for sale. Those will be added to the ones from Journal Register, Cox and probably another large chain, Gatehouse. As the market becomes awash with properties, the value of newspapers will move down sharply. Large firms like Gannett (NYSE: GCI) can no longer take on debt to cherry pick properties and build their businesses.
An even worse sign that the end of many newspapers is around the corner is the possible closing of one of the largest properties in the U.S, the Newark Star-Ledger. According toThe Wall Street Journal, "the publisher of the Star-Ledger told employees that it may have to close the newspaper in January after struggling to reach a new contract with one of its key unions." The Newhouse family owns the paper.
Newspaper failures will probably come by the dozens now. It leaves open the question of how people will get local news. Some analysts believe that the internet killed the paper industry. That will leave a big void on the information super-highway.
U.S. stock futures edged lower Wednesday morning after the government announced late Tuesday it would help save AIG. Investors may be relieved with the action on AIG and even the Federal Reserve decision not to move Tuesday, leaving room for a future rate cut, there are still big concerns about the state of financial markets. Investors today will also get data from on building permits and housing starts for the month of August. Oil rebounded today ahead of inventory report to over $93 a barrel.
The Federal Reserve said late Tuesday that it would to lend $85 billionAmerican International Group (NYSE: AIG), taking a 79.9% stake in the company. AIG shares are still sinking 30% in pre-market trading.
Meanwhile, as the government refused to help Lehman Brothers (NYSE:LEH) and the company filed for Chapter 11 Monday, Barclays PLC (NYSE: BCS) said it would buy Lehman's banking and capital markets business for $250 million. Barclays walked away from the deal a few days ago, perhaps waiting for a better price, in what many say BAC should have done with Merrill. BCS shares are up over 5% in pre-market trading, LEH's down over 25%.
Morgan Stanley (NYSE: MS) reported its quarterly earnings early to calm investors, posting better-than expected results. It seems the last two major independent investment houses, Morgan and Goldman Sachs (NYSE: GS), which also reported earning Tuesday, both posted third-quarter profits despite continued chaos in the financial markets.
J.P. Morgan Chase (NYSE: JPM) is reportedly in advanced talks to make a bid for Washington Mutual (NYSE: WM).
Tribune, formerly a public newspaper and broadcast company, lost the publisher of its largest newspaper, the LA Times, and the editor of its flagship, the Chicago Tribune. New controlling shareholder Sam Zell is in trouble, burdened by buyout debt he may not be able to pay.
Most analysts saw another modest drop in newspaper ad revenue this year. It has been much worse than that. At some companies in the industry, ad sales are off nearly 15%. An analyst recently dropped his price target on The New York Times Company (NYSE: NYT) to $8 and said the firm would have to cut its dividend. The stock currently trades at $13.21.
The two public companies which are at most risk for not making it another year are Gatehouse (NYSE: GHS) and McClatchy (NYSE: MNI). Both took on big debt loads buying newspaper properties. Both are seeing operating income chopped by falling sales. Either could hit debt service problems which could force them to sell properties of file for Chapter11.
Gatehouse dropped as low as $1.11 in the last few days. Its 52-week high is $19. McClatchy is down to $4.93 from a 52-week high of $28.65. Gatehouse is the most troubled with a high dividend and $1.3 billion in long-term debt.
Newspapers companies have gone from being in a tight spot to being candidates for liquidation. They are a short-seller's dream.
There seems to be no end to the bad news for newspaper companies. Yet this may actually be good for Gannett (NYSE: GCI).
That is, the company has acquired the rest of ShopLocal.com from McClatchy (NYSE: MNI) and Tribune, which recently went private. The details: Gannett snagged McClatchy's 15% stake for $7.9 million and Tribune's 42.5% position for $22.3 million.
ShopLocal calls itself as a "multi-channel shopping services" company. Essentially, the platform helps you effectively market locally, using online methods.
Gannett also owns PointRoll, which develops rich online media. Thus, by combining this with ShopLocal, it will have more interactive ad formats. It looks like the parties are already working on back-to-school campaigns. And with ShopLocal being under complete control, it should be a lot easier.
TheStreet.com's Jim Cramer says massive debt at the newspapers means they no longer work as businesses.
Maybe newspapers don't work as businesses. The shocking 10% workforce reduction announced this week by McClatchy (Cramer's Take) (NYSE: MNI), formerly the best-run chain out there, is a reminder that all of these companies have borrowed too much money and don't generate the cash flow to make it work. McClatchy, with an 8% yield, is showing signs of collapsing under its own weight, something that has been exacerbated by Wall of Shame performer Gary Pruitt, a man who is still, amazingly, the CEO.
But all of this was totally predictable. I have never seen an industry attract so many buyers with so much debt and so little equity.
Take Tribune (Cramer's Take). Sam Zell's a smart guy. He let the newspaper employees do the heavy lifting when he bought the Tribune company. That was so smart. He will be out very little if the deal fails. The workers will be out their retirement money. That was a smart deal -- unless you work there -- but I have spoken against that deal so many times I am sick of talking about it.
McClatchy could have weathered this downturn, instead of -- it is a bit unthinkable, but I think it will happen -- defaulting on its debt, if it hadn't been determined to buy a bunch of properties for much more than they are worth. The New York Times (Cramer's Take) (NYSE: NYT) and Gannett (Cramer's Take) (NYSE: GCI) spent a lot of money, but they didn't have to buy back stock. Gannett's 6% yield isn't tempting in the least.
McClatchy (NYSE: MNI), the third largest newspaper chain in the US, cut 10% of its work force as its May advertising fell about 16%. According toThe Wall Street Journal, "McClatchy, which owns the Miami Herald, the Sacramento Bee and 28 other dailies across the U.S., expects to save about $70 million annually from the job cuts."
McClatchy made the mistake of buying competing chain Knight-Ridder two years ago, just as the business was falling apart.
The fact that newspapers are in trouble is old news. What is not is the terrible rate at which newspaper revenue is falling now. Based on the current rate of advertising attrition, papers could loss 40% to 50% of their major sales base in three years. Revenue from online versions of the papers is not growing nearly fast enough to replace that.
Many of the public newspaper chains still pay large dividends. With share prices down as much as 70% in the last year, they sport yields which their cash flow cannot support. Dividend cuts are likely to cause more investors moving out of the stocks.
McClatchy now has $2.4 billion in debt, most of its from the Knight-Ridder deal. That plan, put together by CEO Gary Pruitt, has nearly ruined the company.
Odd that he is not one of the 1,400 people leaving.
Douglas A. McIntyre is an editor at 247wallst.com.
MOST NOTEWORTHY: Anheuser-Busch, Brasil Telecom and Finisar were today's noteworthy downgrades:
UBS downgraded Anheuser-Busch (NYSE: BUD) to Neutral from Buy citing the InBev unsolicited bid.
JP Morgan cut Brasil Telecom (NYSE: BRP) to Underweight from Neutral on concerns over the merger with Telemar.
Piper downgraded Finisar (NASDAQ: FNSR) to Neutral from Buy following strong Q4 results, as they believe the company's acquisition of Optium creates substantial integration risk.
OTHER DOWNGRADES:
Merrill cut Weyerhaeuser (NYSE: WY) to Neutral from Buy.
PDL BioPharma (NASDAQ: PDLI) was downgraded to Neutral from Outperform at Credit Suisse.
Wachovia downgraded McClatchy News (NYSE: MNI) to Underperform from Market Perform.
Archer Daniels (NYSE: ADM) was downgraded to Equal Weight from Overweight at Morgan Stanley.
The newspaper business had been bad and getting worse. Ad revenue at some large chains with properties in the hard-hit economies of Florida and California are seeing their classified businesses drop by over 30% compared with last year. A number of newspaper chain stocks are down well over 50% since the middle of 2007.
The largest newspaper company in the U.S., Gannett (NYSE: GCI), is getting ready to take a $3 billion, non-cash charge to write-down the value of its assets. The charge will cover almost 20% of the firm's total assets. According toThe Wall Street Journal, "The publisher of USA Today and more than 80 other daily papers, Gannett is the latest newspaper company to take an impairment charge reflecting difficult industry conditions."
Of all U.S. newspaper companies, Gannett is the most likely to weather the current storm, unless it never ends. The firm's long-term debt is $4 billion, which is modest for a company its size. Gannett's revenue last year was $7.5 billion.
Other companies in the industry may not be so lucky. Some, like McClatchy (NYSE: MNI) and Gatehouse (NYSE: GHS) have taken on substantial debt loads to buy other newspaper companies. They may not have the operating income to cover debt service.
That means a lot of newspapers could be auctioned off later this year.
After the 3G iPhone was finally announced Monday, with a price tag and a business model that could take the funky phone to the masses, Apple Inc. (NASDAQ: AAPL) ended lower on some profit taking. But have no fear. Already this morning, Citigroup raised Apple's price target to $287 from $248 with a Buy rating, and Lehman raised it to $234 from $202, maintaining its Overweight rating. Despite the stock trading higher in European markets, it's still not showing signs of recovery in premarket trading in the US.
ThinkPanmure initiated Intel Corp. (NASDAQ: INTC) with a Buy, claiming it is gaining market share over rival Advanced Micro Devices (NYSE: AMD). The analyst also said Intel is gaining prominence in the server, desktop and notebook markets.
Hewlett-Packard Co. (NYSE: HPQ) updated its desktop and notebook computers. It introduced Tuesday in Berlin a new ultra-thin portable, the Voodoo Envy, to rival Apple's MacBook Air. H-P also added a new version of a touch-screen desktop PC and 16 notebooks for consumers and businesses.
The Tribune is not a public company anymore, but CEO Sam Zell says enough about his plans that it might as well be.
According toThe New York Times, Zell "announced a set of deep cuts, saying that shrinking revenue left them no choice." One of the things that means is fewer pages devoted to news as newsprint use is reduced.
The Tribune carries a lot of debt, so it is in more trouble that other chains such as The New York Times Company (NYSE: NYT) and Gannett (NYSE: GCI). But, other large paper operations including McClatchy NYSE: MNI) and Gatehouse (NYSE: GHS) also have massive debt burdens from money they borrowed to expand their empires.
What all of this means is that more reporters and editors will lose their jobs and the typical reader will get a newspaper that is thin as toilet paper. For newspaper company investors it means that stocks, some already down 50% to 70% in the last year, are going down even further.
The trouble also may spell the end of nearly a century of big papers like The New York Times being the news sources of record. The company recently cut 100 people, most of them from the news operation. Covering major national and international stories is becoming more difficult and at some point it may be impossible.
There is always CNN.
Douglas A. McIntyre is an editor at 247wallst.com.
In a sign that the newspaper industry's problems are accelerating, Gannett Co., Inc. (NYSE: GCI), the largest newspaper chain in the U.S., posted awful numbers for April. The information makes it more likely that the stocks of smaller paper companies like The McClatchy Company (NYSE: MNI) will take a dive over the next several weeks.
GCI revenues for the period ended May 4, 2008 declined 7.7 % compared with the same period in 2007. Revenue in the big publishing division fell almost 11%. Real estate classifieds fell almost 24% as home sales in most regions fell apart.
According to Gannett "At USA TODAY, advertising revenues were down 6.4%." As odd as it may seem, falling revenue is not the industry's single biggest problem because most companies like Gannett still have good profits. However, falling operating cash flow is killing companies that took on debt over the last decade to buy other newspapers in the hope of building scale and cutting costs. McClatchy has over $2.4 billion in debt after buying rival Knight-Ridder.
Banks may end up owning some of the newspaper chains.
Douglas A. McIntyre is an editor at 247wallst.com.
Within the past years, several public newspaper companies have been pushed to the cliff of insolvency. They have taken on too much debt and the downturn in advertising has put them in a position where they cannot cover interest payments.
U.S. stock futures edged lower Wednesday morning after the government announced late Tuesday it would help save AIG. Investors may be relieved with the action on AIG and even the Federal Reserve decision 
There seems to be no end to the bad news for newspaper companies. Yet this may actually be good for 
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The Tribune is not a public company anymore, but CEO Sam Zell says enough about his plans that it might as well be.
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