With Five Days Until Independence, Six Measures of Tribune Publishing's Future

It's do or die time for Chicago Tribune and its sibling newspapers. On Aug. 4, Tribune Publishing Co. will be on its own, after parent Tribune Media Co. hives off its print properties. While Tribune Media will remain privately held, the new publishing company will start trading the next day on the New York Stock Exchange under ticker symbol TPUB. Tribune Media is keeping the faster-growing broadcast business, including WGN-TV, and some of its most valuable assets, such as real estate gems like Tribune Tower. Meanwhile, Tribune Publishing, which includes the Los Angeles Times and Baltimore Sun, will be freighted with piles of debt and bleaker prospectsin a declining industry. Still, the publishing unit remains profitable, and CEO Jack Griffin said he will use Tribune Publishing's income to buy smaller papers around its big dailies with the aim of becoming more attractive to national advertisers. He also plans to redesign his papers' websites, using the recently overhauled Los Angeles Times site as a template. But in an interview, he acknowledged that inevitably he'll have to cut expenses, too. To assess whether Tribune Publishing is "doing" or "dying," media industry analysts and Tribune shareholders say these are the numbers to watch: Revenue The company's fate depends on its ability to grow, said Rich Hummel, director of research at Kirr Marbach & Co., which owns Tribune shares. Over the past five years, the publishing unit's operating revenue has slid 5% to 7% annually (except in 2012, when revenue was flat), dropping to $1.8 billion last year. The 2013 slide was steeper than the industry's 2.6% decline in sales. Mr. Hummel said that Mr. Griffin's plans to add ancillary newspapers could buttress existing brands and stoke advertising sales, lifting revenue. The company already has made some small acquisitions recently, including two community newspapers in Maryland for $30 million and 15 weeklies in Connecticut. "Acquisitions of titles in (or adjacent to) TPUB markets could allow the company to leverage its scale in procurement as well as its editorial, sales and delivery infrastructure," CRT Capital Group analyst Lance Vitanza said in a July 17 report. Even so, he predicted revenue will shrink 4% this year to $1.72 billion. Cash Central to growth will be the company's cash position. It expects to start with about $50 million. That's not much. The New York Times Co., for instance, has $728 million in cash, while Time Inc. recently was spun off from Time Warner Inc. with $150 million. News Corp., whose assets include cable TV in Australia and book publishing in addition to The Wall Street Journal and New York Post, had $3.2 billion in cash as of March 31. "It's going to be difficult unless management does something wonderful to cash flow," Mr. Hummel said. "It's a newspaper company and they're struggling to grow the revenue." With so little in the bank, Tribune Publishing won't have enough for an acquisition spree, said Matt Swaim, a portfolio manager at Tribune shareholder Advisory Research in Chicago. In fact, Mr. Swaim said he is most concerned about the company spending so much that it doesn't have enough to motor along if the economy slows. To that end, the company could consider the sale of certain newspapers, he said. "We want to hear about the opportunity, but they have to be mindful of their balance sheet," he said. Costs As much as he wants to build up his new company, Mr. Griffin said he will be cutting costs as well. "Every newspaper company has taken costs out of the business to conform to the changing revenue conditions -- it's an absolute requirement of the business," he said. Mr. Vitanza said he expects the company will lower expenses by $65 million this year and more in 2015. One way would be centralizing more functions under one corporate roof. Mr. Griffin has the same idea, pointing to savings the company realized recently by buying copiers on a corporate level rather than each newspaper procuring them on their own. "We are always looking for efficiencies in the way we do things, in the way we acquire goods and services," Mr. Griffin said. "We have meaningful low-hanging fruit." While the publishing operation has lowered expenses by $250 million over the past three years, according to a presentation Mr. Griffin has been making to would-be investors, it still has a broad publishing platform with 7,475 employees and total expenses of $1.62 billion for the year ended March 30. And some costs are rising because of the spinoff. It now must pay rent for office space in the Tribune Tower and elsewhere. Mr. Vitanza said that will set the company back by $27 million a year. "I don't think that, given the current finances, they can maintain their current profitability without cutting more jobs," said Ken Doctor, an industry analyst and author of "Newsonomics." Debt Another new cost for Tribune Publishing will be making payments on the $350 million in debt it's taking on as part of the spinoff; of that, $275 million was needed to pay a special dividend to its former parent. Whether or not the company has the financial wherewithal to invest in its growth strategies will depend partly on how it manages this new financial burden. Standard & Poor's analyst Hal Diamond calculates Tribune Publishing's ratio of debt to earnings before interest, taxes, depreciation and amortization at 2.9. That's pretty good; the average for the industry is a ratio of about 5. Still, Mr. Diamond rates Tribune Publishing debt as "junk" with a B+ and considers it to be in S&P's "vulnerable" category, given the long-term decline of print advertising. Profit Of course, the bottom line is the bottom line. While the company reported net income tripled last year to $94.1 million from $28.4 million in 2013, that figure included a generous one-time tax benefit of $71 million. The 2012 figure was down from $41.6 million in 2011. Adjusting for the spinoff, Mr. Vitanza puts Tribune Publishing's earnings at $68 million last year. He foresees that falling to $60 million in 2014, a decline of roughly 12%. Mr. Vitanza said Tribune Publishing's enterprise value will slide to $172 million from $230 million because of higher expenses and the loss of income from Careerbuilder.com and Classified Ventures, which are separating from Tribune's newspapers. At that lower value, its value will be five to six times EBITDA. He pegs New York Times' enterprise value-to-EBITDA ratio at 8.4, by comparison, and McClatchy Co.'s at 5.2. Circulation One number that the company may hope people don't pay close attention to is circulation. While Tribune Publishing's presentation to would-be investors boasts Sunday print circulation of 2.5 million for its combined newspaper group, that figure has declined from 4.3 million in 2005. Locally, Chicago Tribune's circulation stood at 440,000 for weekdays and 790,000 for Sundays (print and digital) for the six months ended March 31, according to a Tribune Publishing filing with the Securities and Exchange Commission. Weekday circulation is down 21.5% from 559,000 from the six months ended September 2007, while Sunday circulation is off 14% from 918,000. (The 2007 data exclude digital readership.) Indeed, the newspapers seem to have accepted the reality of a declining print readership, with the Chicago Tribune recently removing many of its sales boxes from the streets. Lynne Marek is a reporter at Crain's Chicago Business.

With Five Days Until Independence, Six Measures of Tribune Publishing's Future

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