Financial Woes for the New York Times

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.

The Z-score

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:
  • Z Score = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5

  • X1 = Working Capital/Total Assets
  • X2 = Retained Earnings/Total Assets
  • X3 = Earnings Before Interest and Taxes (trailing twelve months)/Total Assets
  • X4 = Market Value of Equity/Book Value of Total Liabilities
  • X5 = Sales (trailing twelve months)/Total Assets
  • Z = Overall Index or Score
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:  





Z Score 9/2007





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:
"There does not seem to be any prospect for a miraculous turnaround. Print will not suddenly find itself re-emerging as a popular medium in a surge of throwback appeal. Craigslist is not going to fade away, forcing urban dwellers to flee back to papers to sell their bicycles and rent their apartments. The ink-stained wretch is a dying breed.

That is the general situation. The particular situation was brought into stark relief by the end-of-August publication of a report by Fitch Ratings, which goes a long way towards illustrating what's wrong. When 2007 began, Fitch posted a negative outlook for the newspaper industry; now, three quarters of the way through, the outlook is even worse."
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.
"In what could not possibly be a coincidence, Rupert Murdoch's Wall Street Journal (WSJ) and New York Post both announced today that they will be publishing glossy weekend magazine inserts supported by high-end, luxury advertisers. The Post will be inserting "Page Six" magazine in its Sunday editions, featuring celebrities, fashion, profiles, food, wine, and restaurants. Sunday's first issue will be 96 pages, and will include ads from Calvin Klein, Mercedes-Benz, BMW, and other high-end advertisers rarely seen in the Post. Then a year from now, the WSJ will begin inserting "Pursuits" magazine into its Saturday editions once per month. Exploring "the world of wealth," this publication will include ads for luxury goods and travel."

All of which means that crosstown at the NY Times, the Gray Lady is bracing to have her purse snatched again [....]

Worse still for the Times, rather than grow new advertisers, the Post seems intent on stealing high-end ones from the Sunday Times. Same goes for the WSJ, with its new weekend magazine.
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.
"It's going to be different from CNBC, just as Fox News is different from CNN," Murdoch told Wall Streeters at a Goldman Sachs-sponsored conference. "CNBC is a financial channel for Wall Street; we're for Main Street." CNBC has had little competition, short of Bloomberg TV, since CNN shuttered CNNfn in late 2004. Fox Business Network is set to launch in 34 million homes Oct. 15, when it will begin to compete with the NBC Universal-owned network.

"They dwell too much on failures and scandals and politics," he said. "We want to spend a lot of time on innovation, successes and people who are making money"
Broaden the audience, make more more compelling television, grow ratings.

Here's the money quote that sums up his philosophy:
"Cost savings, he said, "are not really what we're about; we're about expanding revenues."
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.