September 27, 2007
Financial Woes for the New York TimesBy Christopher J. Alleva
New York Times Company's reported financial results, outlook, and stock price keep getting hammered by poor business performance. Having announced it will pay $125 million in dividends, the company must increase its profits if it is to avoid further drawing down of shareholder equity, amounting to gradual liquidation of the company.
Last week I wrote about the bond covenants that could be violated if dividends continue to exceed earnings
The prospects are grim. The newspaper industry is in serious trouble. But the Times faces a special challenge in the arrival of Rupert Murdoch as new owner of the Wall Street Journal, not to mention any further problems which might grow out of the MoveOn ad scandal and the regulatory risks associated with the Federal Election Commission and the Sarbanes-Oxley Act.
But don't take my perspective by itself. A popular financial tool for analyzing bankruptcy risk reveals much.
A popular tool in analyzing bankruptcy risk is the Z-score model, which has demonstrated a track record in predicting corporate bankruptcies. The model was developed by Edward Altman, an NYU Stern School of Business finance professor who literally wrote the book on commercial bankruptcy.
He devised the Z-score model in the 1960s and has been refining it ever since.
The model uses five financial ratios and weights them to create a single Z-score value for a company:
The higher the Z-score, the less risk of bankruptcy. A Z-score of 1.8 is considered the upper bound of distress for a firm.
I calculated Z scores for the New York Times Company (NYT), the Washington Post (WPO), News Corp (NWS), and the McClatchy News Group (MNI) using the 10K and 10Q reports. Below are the results:
The New York Times is tottering on the edge, with a Z score just 0.035 above the upper bound of distress. News Corp has a score of 2.139, in line for a company with a record of aggressive growth funded by debt. Not surprisingly, the Washington Post is the most solid company, well capitalized and conservatively managed that should allow them to make the transition from print relatively unscathed.
McClatchy's stock is down 50% for the year. The precariously low Z score is attributable to their purchase of Knight Ridder with debt in June of 2006. Even after dumping the papers in the worst growth markets at what seemed at the time like good prices, (just ask Bruce Toll who bought the Philadelphia Inquirer) the net acquisition cost was greater than the business can support. With the notable exception of the Wall Street Journal sale to News Corp, the Knight Ridder transactions were a turning point in newspaper valuations.
Prior to the McClatchy/Knight Ridder deal, buyers set aside reality on ad revenues and allowed their ego-driven belief that they could do it better overpower the objective truth.
Further confirmation of this reality came in August, with the Fitch Ratings outlook for newspaper publishers. Hamilaton Nolan of PR Week commented:
The outlook is even worse, and for the New York Times all the more so. The Times has $250 million in debt due in 2009 and $250 million due 2010. They have $225 million available under a 2012 issue and $300 million available under their short term credit lines. They can use the $225 million to fund the 2009 maturity but after that their options are limited for 2010.
The Perfect Storm
Running headlong into a perfect storm, the Times' has to fight off attacks on their ad revenue on three fronts: A cyclical downturn in the crucial auto and real estates sectors, the inexorable migration of advertising to the internet, and lastly, the competitive pressures likely wrought by Murdoch's purchase of the Wall Street Journal.
The Future of the News wrote an excellent summation of the revenue strategy Murdoch is planning to use to pinch Pinch.
Leveraging the NY Post and the WSJ brands to snatch advertisers from a distressed competitor? Brillant. Can you say cross promotion platform? Rupert can.
Variety reports on Murdoch's upcoming launch of the Fox Business Network.
Broaden the audience, make more more compelling television, grow ratings.
Here's the money quote that sums up his philosophy:
Rupert is all about top line growth. Pinch is reduced to selling off valuable assets and hollowing out his core business with drastic expense cuts just to pay the current dividend!
If I were a betting man I would take Murdoch over Pinch any day of the week. Pinch inherited the New York Times, a global icon in newspaper publishing. Murdoch inherited a tiny paper called the Barrier Miner, in Broken Hill, New South Wales, (2000 population: 21,000), and Southdown Press, a small publisher of American comic books. While not nothing, it is an awfully humble beginning compared to Pinch.
All told, the Murdoch's companies were probably worth at most a few hundred thousand US$ or so when he took control of them. Today, the News Corp. market cap is $68.82 billion, while the Times is $2.89 billion. News Corp., in other words, has a market cap almost 24 times as much as the New York Times.
It's as if Pinch left England on the QE2 and washed up in New York harbor in a lifeboat, while Murdoch left Austrailia in a rowboat and sailed into NewYork commanding the Seventh fleet.
The battle is on.