Virtually all the nation's major newspaper publishers--Tribune, McClatchy, PMH--are in financial trouble, stuck in a morass of debt with barely enough cash to make scheduled payments. In fact, some have already missed payments--but even for those that remain solvent, a disturbing scenario lies ahead. With revenue declines accelerating, once-serviceable levels of debt may suddenly become crushing.
Right now, all eyes are on Tribune Co., which carries a vast debt of almost $12.8 billion, about two-thirds incurred through its recent acquisition by Sam Zell. Servicing the debt requires payments of around $1 billion in 2008, and so far, Zell has made ends meet through asset sales and an aggressive cost-cutting strategy.
This year, the company has raised $121 million with the sale of a Hollywood studio and $650 million with the sale of Newsday to Cablevision; the Chicago Cubs baseball team and historic Tribune Tower in downtown Chicago are also on the block. On the cost-cutting side, management announced a new 50-50 policy, whereby its newspapers will contain no more than 50% editorial content, allowing significant staff reductions.
But even stringent measures will prove futile if the situation worsens. According to Ken Doctor, an analyst with Outsell Inc., the schedule for Tribune's debt payments was drawn up in 2007 in accordance with forecasts that looked reasonable at the time, but turned out to be too optimistic now. "We're really seeing a couple trends coming together," Doctor explained: "Circulation began falling at a faster rate of 2% to 3% a year back in 2004-2005; now, over the last year, we've begun to see revenues migrating from print to online at an even faster rate, and the real coup de grace, delivered in the last nine to 12 months, is the economic downturn as a result of normal cyclical activity."
Selling the Farm?
Indeed, Zell told employees of The Baltimore Sun that his team originally assumed an overall revenue decline of 2% to 3% for 2008, but in the first quarter of 2008, total revenues fell 8% to $1.1 billion. And it doesn't help that Tribune's previous management apparently overestimated cash flow in 2007 by up to 20%, skewing any forecast for 2008 based on year-to-year comparisons.
At this rate, Tribune may default on its debt sometime in 2009, according to financial analysts with Goldman Sachs and Fitch Ratings. Default could be declared even earlier than that, per the terms of its bond covenant, which requires the company to maintain a ratio of cash flow to debt no less than 1-to-9. That means it must generate cash flow of about $1.1 billion in 2008, but this goal looks increasingly unrealistic, considering that cash flow in the first quarter of 2008 fell 16% to $200 million.If the rest of the year goes the same way, the company will generate total cash flow of just $970 million.
But these asset sales raise a natural question: is selling revenue-producing properties really the best way to pay off debt? The question is most pressing at Tribune, where the financial situation is most dire, and Zell finds himself having to sell key assets he never intended to part with. As recently as December 2007, he vowed not to sell the Chicago Cubs and Wrigley Field, but accelerating losses in publishing revenues have forced him to retreat.
While praising some of Zell's moves so far, including the sale of Newsday to Cablevision at a premium, Doctor said further sales could sacrifice Tribune's core business in exchange for short-term security. Here Doctor noted that the Los Angeles Times is widely considered a prime candidate for sale, as its poor financial performance has been a drag on Tribune's profits in recent years. But "the newspaper still produces a significant percentage of cash flow of Tribune, and if they do manage to sell it, that's going to fall off the table."
Looking to the future, Doctor said that "selling the Food Network, the Los Angeles Times, the Chicago Cubs, would buy them a certain number of months in each case--but it doesn't provide a long-term strategy." Bottom line: when an industry continues to lose market share and lose revenue, it's tough to pay off debt.