The bankruptcy filing of the Tribune Co on Monday is just the latest and largest piece of evidence that the US newspaper industry is suffering the hangover from an immense buying spree in 2006 and last year at what turned out to be the worst possible time for the buyers, just as the business was about to enter a drastic decline.
Newspapers would be in trouble either way. The steady leak of advertising and readers from print to the Web has become a widening torrent in this recession year. Most newspapers remain profitable, but the margins are dropping fast, with the industry losing about 15 percent of its ad revenue this year.
But the companies in the weakest condition are there largely because they borrowed a lot of money to buy papers, often at inflated prices, and the biggest of those deals were struck in 2006 and early last year. Tribune’s was the biggest of them all — US$8.2 billion to take private the company whose assets include the Los Angeles Times, the Chicago Tribune and 23 television stations, a transaction that almost tripled the company’s debt.
In the year before that takeover was announced, the McClatchy Co bought Knight Ridder, including papers like the Miami Herald and the Kansas City Star; the MediaNews Group bought several papers, including the San Jose Mercury News and the Pioneer Press in St. Paul, Minnesota; investors in Philadelphia bought the Inquirer and the Daily News; and private equity firm Avista Capital Partners bought the Star Tribune in Minneapolis. Smaller companies like GateHouse Media bought up dozens of local papers.
If it were possible to unwind those deals, “the business would still be in pretty difficult shape,” said John Puchalla, a vice president and senior analyst for Moody’s Investors Service.
“It wouldn’t have changed the downturn,” he said. “But it sure would have changed the vulnerability to the downturn. Ten to 15 years ago, most newspapers were carrying a pretty low amount of debt. But companies have levered up over time, and in the last couple of years, some companies pushed it too far.”
Most newspapers still have earnings before interest, taxes, depreciation and amortization that are equal to 10 percent to 20 percent of their revenue. That is down from 20 percent to 30 percent in the middle of this decade, but tolerable — if not for the burden of making debt payments.
The Star Tribune, the Philadelphia papers and the Journal Register Co, publisher of the New Haven Register, have all suspended debt payments while trying to reach sustainable new terms with their lenders. Executives at the Minneapolis paper have talked of bankruptcy.
McClatchy and MediaNews have succeeded in paying down their debts to more manageable levels, but they also had to negotiate new terms this year with their creditors. Freedom Communications, which publishes the Orange County Register, recently warned that it might not be in compliance with the cash-flow requirements in its debt covenants.
Credit ratings for nearly every newspaper company judged by the major ratings agencies have been downgraded well below investment grade.
“I think there will be more pressure on these companies, and more bankruptcies,” said Dave Novosel, senior analyst at Gimme Credit, a research firm.
Some newspaper companies would like to merge with others in the same region, but have been barred from doing so by media ownership regulations. A 2006 deal in the San Francisco Bay Area between MediaNews and one of its investors, the privately held Hearst Corp, which publishes the San Francisco Chronicle, was blocked on that basis.
Putting papers up for sale, as several troubled companies have done, will not solve the industry’s problems, said David Joyce, a media analyst at Miller Tabak & Co, a small investment banking firm.
“Selling assets also means selling off cash flow, and they need that cash flow to service the debt,” he said. “And any sales would be fairly close to fire-sale prices, because people aren’t buying assets, especially in the newspaper business.”
There are exceptions to this story, including the Gannett Co, the largest newspaper chain in the US. Companies like Gannett that do not have a lot of debt and did not make major new newspaper acquisitions in recent years are in much better shape, despite sharp revenue declines.
Looking back, what happened to newspapers in 2006 and last year paralleled the bubble in the housing market, with similar results.
“There was very cheap credit available,” despite risks that should have been obvious to everyone, Novosel said. “The banks were willing to lend, and people were willing to buy at these prices because they figured if asset prices kept going up, they’d be fine.”
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