It's Not All Zell's Fault - The Newspaper Model Is Busted

Has it been less than a single year? One year since Sam Zell took over the Tribune Company (TXA) as its management, like Knight Ridder's (KRI) two years earlier, simply ran out of juice and said, "Hey you try it, we've run out of ideas and energy."

In one quick year -- who's doing the photo slideshow online? -- we've seen what happens when the barbarians do enter and start to rule within a formerly genteel kingdom. If it were any other industry, we might see it more as entertaining, but when it comes to the news industry, it's been jaw-droppingly sad.

As the Tribune prepares for the possibility of a bankruptcy filing this week -- and, if not now then probably later -- we can see the shock waves radiating out from the news:

• Yes, Sam Zell's words and actions have been outrageous, sometimes outrageously and even refreshingly true -- on non-commissioned salespeople, on subscription pricing, on trying new things -- but in the end, it's not about Sam Zell. Look around. Just in the last couple of weeks, we've seen Scripps sign the Rocky Mountain News' death warrant; reports that McClatchy has been shopping around the Miami Herald (an offer that insiders tell me has been floating around South Florida for months); the Journal Register Company, living on borrowed time and about to shut down two dailies; and Freedom's East Valley Tribune testing the very meaning of "daily" newspaper.

The business model's busted.

Whether you are good journalism advocate Gary Pruitt or it's-just-another-business Sam Zell, the cards dealt are fairly similar. What separates Zell from the pack, but maybe just barely, is the mountain of debt he gorged on to make the ill-conceived ESOP scheme work. From Day One, he put the sword over his own head and then cried wolf.

• We've learned that Zell isn't too good with math. He told Portfolio's Joanne Lipman just last month that:

When we looked at the historical numbers, we saw an average erosion of about 3 percent. At the time we underwrote the transaction, we used a 6 percent erosion.

But look at Tribune's 4Q, 2007, the quarter running up immediately to Zell's finalization (on Dec. 21, 2007) of the buyout, and you see that its publishing operating revenues compared to a year earlier weren't down three percent or six percent. They were down 13% for the quarter (and 9% for the year overall). So why would Zell budget half of what the last quarter was telling him, as newspapers' deeper decline was evident for all who, well, evident for all those who read newspapers.

I suppose in a more trusting time we might have expected lenders Citibank (C), Bank of America (BAC), Merrill Lynch (MER) and JP Morgan (JPM) to have actually vetted his numbers. But hey, it was probably a no-doc loan.

• We'll see if this is the first bankruptcy domino in the newspaper business. In the wider financial meltdown, newspaper companies have become just part of a much larger problem. Creditors have been eager to work with McClatchy, Lee, MediaNews, Freedom, Gannett and others -- just about everybody -- to adjust lending terms. They've loosened (in the short term) covenants linking (diminished) cash flow to debt, given term extensions -- and picked up a little vig on interest rates. They seem to so far figure that that's a better route than forcing the companies into bankruptcy. A Tribune filing though may lead to lender rethinking, in what we've learned is a herd trade.

• If talk of default increase and bankruptcy is ramping up now, what about March? The consumer recovery, at the most Obamamistic, is six months away. As with the sudden Rocky announcement Friday, we're seeing newspaper companies increasingly throwing in the towel. Once those 4Q revenue numbers trickle out, it'll be worse.

• There are two bad markets determining the fate of newspaper companies now. One, of course, is the news and advertising market. Print ads are down toward 20% and online will decline mildly this year. And here comes the latest 2009 forecasts -- down 3-6% overall -- to be presented at Monday's UBS Media Conference.

The second, of course, is the real estate market. We all know the story there, Wednesday's story. If you had to bet, though, which market will come back first, newspapers or real estate, you'd have to bet on real estate. And therein may lie the next newspaper industry act. Whether it is McClatchy trying to sell bayfront Miami Herald land, or Tribune selling the Colonel's Tower, the fate of newspaper companies may depend on the real estate recovery. If that land and/or the buildings on it seem to be coming back to commercial life, newspaper companies or their lenders may see new moves. And that may determine a good deal about what we'll have for daily reading by 2010 and 2011.

Comments

[Sparticus:]

Zell, will get a bailout, albeit indirectly. TARP money will find its way to his "No-Doc" lenders, who may have already written down some of Tribune's debt. Then, under an orchestrated, empty threat of bankruptcy, the lenders will restructure and forgive and ... Voila! A bailout without even asking for one.

2008 Dec 08 11:17 AM

[Badgolfer:]

What in hell was Zell thinking ? He's a primo RE guy,most respected.I saw him on TV a year ago talking about the deal and I couldn't believe my eyes.Newspapers were in free fall already.

2008 Dec 08 11:24 AM

[swaps:]

With 8 billion in assets and 13 billion in debt one assumes he will be classified by the guvmint as too big to fail.

2008 Dec 08 11:10 PM