Thoughts on the Newspaper Industry and the NYT's Peter Brant Profile

Includes: GHC, NWS, NYT, RFP
by: Nadav Manham

A snarky and gossipy article about Peter Brant in the Sunday Style business section of the Times. With barely disguised glee, gossip columnist business reporter David Segal chronicles the decline in Brant's personal life. With the little space he has left over, Segal also writes about Brant's recent business difficulties. Below I've cut and pasted the business-only passages from the four-page article:

. . . he spent the last decade quietly expanding his newsprint manufacturing empire, borrowing hundreds of millions of dollars and gobbling up mills until his company, White Birch, was the second-largest player in North America.

By 2008, he seemed, like our economy, to be a spectacularly efficient money-making machine . . .

So what we have here is a portrait of love and leverage gone wrong, a reversal of fortune that — like so many stories of our economic cratering — would have been hard to imagine a little more than a year ago . . .

For years, the financial foundation of all these ventures has been the newsprint company, which Mr. Brant’s father co-founded in the 1940s. But these are dismal days for anyone selling paper to the print media. Several White Birch rivals have filed for bankruptcy, and White Birch missed an $18 million interest payment due in late September . . .

Mr. Brant’s creditors — a group of hedge funds — might be running out of patience. Last year, they hired a law firm, Latham & Watkins, and an investment bank, Rothschild, both of which have expertise in bankruptcy. This and other tea leaves have a number of analysts and trade reporters contending that White Birch may be on the verge of a major restructuring or worse.

“Information leaks out here and there, but the company is not very transparent,” says Jim Rowland, an analyst who tracks the newsprint business. “But we’re talking about a private company in an industry staring at an abyss of plummeting demand” . . .

“We think things are getting better,” he says, ignoring a cellphone ringing in his pocket as he discusses White Birch’s future. “This isn’t a situation where there’s a company that’s badly managed. This is a situation where the price of newsprint went from 700 and some odd dollars a ton to $420 a ton pretty quickly.”

He deflects any talk of an imminent bankruptcy and seems unbowed and upbeat for a man who says he personally has lost $1 billion in the span of two years. In a recent court filing, he said the ailing newsprint market and the recession had slashed his net worth to less than $500 million today from $1.4 billion in 2007 . . .

He left college without a diploma during his senior year and went to work at Brant-Allen Industries, a paper conversion company co-founded by his father, Murray Brant, an immigrant from a small town near the border of Romania and Bulgaria. Murray Brant spoke 13 languages and prompted his son’s interest in art, film and the newsprint business.

In the early ’70s, Mr. Brant and a cousin, Joseph Allen — the son of Murray Brant’s business partner — led the company into the manufacturing side of the business, acquiring a stake in a mill in Rivière-du-Loup, Quebec. Later, the company became partners with The Washington Post and Dow Jones, publisher of The Wall Street Journal, in a mill in Ashland, Va. . . .

ECONOMIC crises have a way of making bold decisions seem, in hindsight, like folly, and the last six years of Mr. Brant’s career in the newsprint business are a case in point. With Wall Street asserting a need for consolidation in Mr. Brant’s industry, the pace of his mill acquisitions picked up sharply in 2004.

That year, his company spent $205 million for a second manufacturer in Quebec (this one formerly owned by Enron). Two years later, it spent $135 million for yet another manufacturer in the same province.

By 2008, he had bought out his partner, Mr. Allen, changed the name of the company to White Birch and put another pile of chips on the table with his largest purchase to date: $305 million for SP Newsprint, a company with operations in Oregon and Georgia.

When this four-year buying spree was over, Mr. Brant controlled roughly 22 percent of North America’s newsprint market, second only to AbitibiBowater, which has 43 percent, according to John Maine, an economist at RISI, which provides information services to the forest products industry.

Unfortunately for Mr. Brant, he bought SP Newsprint just as a downturn in the advertising market was starting to crush print media, already battered by competition from the Internet. Magazines and newspapers shrank page sizes, reduced run rates, eliminated sections and, in more than a few cases, ceased publishing.

Newsprint use dropped 14 percent in 2008 and an additional 24 percent in 2009, according to Mr. Maine. With capacity outstripping demand, prices fell and mills were closed temporarily to reduce capacity. In some cases, the mills kept running but operated at a loss.

Early last year, AbitibiBowater filed for bankruptcy. In late December, a smaller company, Blue Heron, followed suit. White Birch’s own prospects are difficult to divine; as a private company, the particulars are known only to the principals and a handful of debt holders.

There are, however, occasional peeks behind the curtain. In November, Debtwire, a news service, reported that the company had renegotiated terms for that missed $18 million interest payment and was working out a restructuring agreement with holders of its $653 million credit facility.

“It could be that White Birch and the creditors have a prearranged plan,” says Andrew Ragsly, who covers White Birch for Debtwire. “The company could do something out of court where they say, ‘Lenders, you guys can take all the equity and own the company.’ That happens sometimes and a company avoids bankruptcy proceedings, but the result is the same.”

All murmurs to the contrary, Mr. Brant says that he likes his odds and that his relationship with his creditors is very good. “They understand the situation,” he says. “We think things are getting better — we’re seeing advertising come back; prices are going up again" . . .

The tone of the article is "What an idiot this rich guy is," which doesn't allow for much investigation into why Brant made the decisions he did. But I'm always interested in why rich businesspeople do the things they do, and Brant's business fortunes are closely tied to those of the newspaper industry, historically a BMMT Capital favorite, so I tried to figure out what Brant was thinking. And by the way, it's a little ironic to read an article about a rich scion of wealth who spends too much money and sees his wealth evaporate--in a newspaper owned by a company owned by . . . well let's just say that people in glass headquarters should not throw stones.

Anyway, what was Brant thinking? First of all, some might read the article and conclude that Brant was delusional for buying more newsprint companies when everyone knew that the future of print newspapers was grim. As it turns out, everybody DID know the future of print newspapers was grim, with one caveat which I'll get to. The 2003 10-K of newsprint competitor Bowater (formerly BOW) states clearly that U.S. newsprint demand is in decline and is threatened by the rise of digital media.

Second, the caveat: while newsprint demand in the U.S. declined, newsprint demand in Asia skyrocketed. Here is Wikipedia:

World demand of newsprint in 2006 totaled about 37.2 million metric tonnes, according to the Montreal-based Pulp & Paper Products Council (PPPC). This was about 1.6% less than in 2000. Between 2000 and 2006, the biggest changes were in Asia—which saw newsprint demand grow by about 20%—and North America, where demand fell by about 25%. Demand in China virtually doubled during the period, to about 3.2 million metric tonnes . . . While demand has been trending down in North America in recent years, the rapid economic expansion of such Asian countries as China and India greatly benefited the print newspaper, and thus their newsprint suppliers. According to the World Association of Newspapers, in 2007 Asia was the home to 74 of the world’s 100 highest-circulation dailies. With millions of Chinese and Indians entering the ranks of those with disposable income, newspapers have gained readers along with other news media.

The New York Times article left this out for some reason.

Third: the subliminal effect of carefully chosen words like "bold decisions" and "he spent the last decade quietly expanding his newsprint manufacturing empire, borrowing hundreds of millions of dollars and gobbling up mills until his company, White Birch, was the second-largest player in North America" is to suggest that Brant's participation in the consolidation of the newsprint industry was some kind of ego-fueled all-in bet on the future of the industry, the business analog of buying all those Warhol paintings.

The evidence from the Abitibi-Bowater merger S-4, filed in March 2007, suggests the opposite: that the consolidation of the industry was the least-bad way to effect the capacity reductions that the industry needed and to improve per-unit competitiveness against new foreign competition. You can argue that Brant should have been a consolidatee rather than a consolidator, but it's unfair to portray him as "gobbling up" mills to expand his "empire" in order to become the second-largest "player" in the industry. The better bet is that he felt he had to do it.

Fourth: the strategy kind of worked! Declining US demand was offset by burgeoning Asia demand, while at the same time industry capacity was removed. Demand and supply trends combined to produce the following historical newsprint price trend:

Year Average Newsprint Price per Metric Ton

2002 454

2003 481

2004 528

2005 583

2006 636

2007 601

2008 682

2009 (9 mos) 588

Now, apparently it's not publicly known how much debt Brant took on to fund his consolidation relative to the earnings power he acquired. It's very possible he leveraged his balance sheet too much, leaving him little margin of safety if industry conditions changed for the worse. That would be a bad thing. But it's also possible that he didn't, and was blindsided by the steep drop in newsprint prices just like everyone else.

Without the numbers it's hard to say, so I don't see how this is automatically a "tale of love and leverage gone wrong," or how Brant's story is somehow emblematic of an era. You could just as easily write an article that the story of the New York Times Company (NYSE:NYT) in the 2000s was a tale of love (of dividends and print newspapers) and leverage (taken on to buy back stock and buy more print newspapers) gone wrong.

I'm not necessarily a Peter Brant admirer, who after all did steal my wife. But he doesn't deserve this hypocritical hatchet job.