If the newspaper industry was on thin ice a month ago, the financial meltdown has meant that the creaking and cracking is getting more audible. Think of it as a triple whammy for an industry used to declaring itself the victim of a perfect storm:
- First, the meltdown has deepened, widened and -- most hurtfully - lengthened the consumer spending downturn. Consumer spending of course is a prime driver of ad spending. Fewer dollars to spend -- less money chases those dollars. Classified advertising took the brunt of the first half, 2008 turndown, with real estate, recruitment and auto all down in significant double digits for companies across the board. Recent ad spend estimates (good rundown by PaidContent's David Kaplan) keep going south with the consumer economy, both print and online.
As online revenue growth numbers softened to barely positive or negative, newspaper CEOs changed their emphasis, talking about emerging more strongly in the hoped-for recovery. Now, with economist estimates that we're going into a deeper recession, no one can predict when a recovery might begin, but spring or summer of 2009 look the most optimistic. That means that 2009 could turn out worse, potentially significantly worse, than an awful 2008.
Reduced cash flow -- the bete noire of the industry -- is only getting worse.
- Credit lines are getting more taut. A number of companies have reported credit line moves. McClatchy (NYSE:MNI) moved to buy two years of breathing space, in exchange for higher interest rates and tying dividends to cash flow. Gannett (NYSE:GCI) drew down its line. Publishers and lenders are in hot and heavy discussion across the country on the structure of debt, covenant ratios, cash flow, balloons and dividend cutting. The only good news for publishers here is that lenders really don't want to push publishers into bankruptcy, knowing that they don't have much opportunity to make more of the assets than the current managers. Further, the wider financial squeeze means that ailing newspaper debtors are now one of the lesser problems many banks are juggling. There may be some shelter in wider misery.
- The market for newspaper properties, too, may be frozen. We've seen a glut of formerly enviable properties on the market, from Austin to San Diego to Greensboro to Norfolk. Funny, these were the kind of Sunbelt properties that only a couple of years ago McClatchy built its strategy upon. As newspaper valuations have been halved to maybe 6X EBITDA, these properties have languished -- with potential suitors spooked by reduced and reducing cash flows and the prospect of having to subsidize soon-to-be-unprofitable operations. Now, even the riverboat gamblers out there would be hard-pressed to find someone to lend them money to back their dreams. With the credit markets frozen, how much would any willing lenders charge in interest rates to enable a deal?
Cash is really king, and those who have it are hoarding it, and are less likely (than even a month ago) to use it on a flyer to buy a newspaper.
The newly on-the-market San Diego Union-Tribune, long the coveted jewel in many a CEO's eye (I can recall the Knight Ridder (KRI) yearning for it, following KR's purchase of the Contra Costa papers), has had its tires kicked by seven or so suitors, we're told. My skepticism is similar to Editor and Publisher's Jen Saba, in her new Fitz and Jen blog. It's great to get a peek into the travails and hidden treasures that is now the Union-Tribune, but when it comes to a bid, fewer hands will be in the air.
If we were to put together cash + San Diego, the name "Ron Burkle" burbles to the top. Burkle, unlike the Tierney Philly group and the Avista Minneapolis group, has pockets deep enough to buy the paper, and subsidize operational deficits in the deepening downturn. Is it a good enough deal for him? That'll depend on how much he buys the potential of a "San Diego-dominant multimedia-producing, local sales company" future. (Or, alternatively, he could bring along Bill Clinton as Honorary Publisher, and let his speaking fees alone make up for the ad shortfall.)
Burkle's cash aside, it's hard to see the newspaper transaction business unlocking until credit thaws significantly. Just yesterday, Landmark lost its sale of Nashville TV station WTVF to Bonten Media, when financing fell through. That's a reminder that things, as bad as they were, are worse.
Stock position: None.