Remember all those people who took out home equity loans on their homes to finance a lifestyle beyond their income? Well, the New York Times Company is trying to pull off the corporate equivalent. The Gray Lady announces today:
The New York Times Company plans to borrow up to $225 million against its mid-Manhattan headquarters building, to ease a potential cash flow squeeze as the company grapples with tighter credit and shrinking profits. The company has so far been unable to cut costs fast enough to equal the pace of its revenue nosedive. It requires loans to be able to meet its expenses, and must replace an expiring revolving line of credit (essentially, unsecured borrowing based on faith in the company's ability to pay it back) next May in the amount of $200 million. Because there is little hope that banks would renew the unsecured loan, the company is now planning to mortgage its ownership position in the new skyscraper it occupies in Manhattan.
Richard Pérez-Peña, the Times scribe given the unpleasant task of describing the company's increasingly dire straits, writes:
The Times Company owns 58 percent of the 52-story, 1.5 million-square-foot tower on Eighth Avenue, which was designed by the architect Renzo Piano, and completed last year. The developer Forest City Ratner owns the rest of the building. The Times Company's portion of the building is not currently mortgaged, and some investors have complained that the company has too much of its capital tied up in that real estate. The reason "so much of its capital is tied up in real estate" is that the company actually increased its dividend in the face of economic decline, in effect sending its capital to shareholders when earnings could not cover the dividend. Sulzberger family members got a big increase in their dividend checks at a time that outside critics (like me) were warning them that the company was facing a death spiral. It was enough to keep Pinch Sulzberger in office (he is elected by the votes of a family trust), but it caused the company's debt rating to decline, and had to be cut by 74% earlier this month. Family members just have to grit their teeth and hope Rupert Murdoch develops a charitable streak and doesn't compete too hard for national advertisers in his expanded Wall Street Journal national edition. Good luck with that bet.
With all those Lehman Brothers, Bear Stearns, and other Wall Street jobs disappearing from Manhattan, it follows that the supply of first class office space in Manhattan is going to be increased, while demand falls. This translates into lower valuations on brand new office buildings like the Times owns. In other words, if the company were going to seek a mortgage, it could have done a lot better a year or so ago, when it was blithely mailing out those big dividend checks it couldn't afford.
Having already sold off its lucrative broadcasting properties, the last big assets the company owns are About.com, a website that also would have been worth a lot more a year ago, a minority stake in the Boston Red Sox, and various other newspaper properties. These days, newspapers aren't worth very much, even though Pinch Sulzberger spent over billion dollars buying some a few years ago, though the Red Sox stake probably holds some value. In other words, the New York Times metaphorically still has some family jewels it could pawn, but it is burning through the assets it can sell or borrow against. The company has been downsizing for some time now, but hasn't been able to match the decline in revenues.
Sand continues to run out of the top of the corporate hourglass at the New York Times Company. Had Pinch Sulzberger put corporate survival above his own hold on the company, the dividend would have been cut rather than increased a couple of years ago, and assets sold in an orderly manner at the top of the market. The newspaper business would have been strengthened, and could have cut costs in a strategic manner.
But that opportunity was squandered, and the company's financial position seriously harmed by the reckless dividend hike. When the Sulzberger heirs wake up and ask themselves, "Who wrecked the company?", they will know the answer.
Hat tip: Ed Lasky