Why the New York Times Co. Will Be in Business Until at Least 2012

Revolving Credit Facility Due Date Looms, but Sulzbergers Should Be Able to Retain Control

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NEW YORK (AdAge.com) -- "The month of May came and went," the New York Times Co. told staff last Thursday, "and, contrary to the prediction of one writer, we did not stop printing."

A writer in The Atlantic had called it "plausible" that The New York Times could go out of business by May, so the Times Co. was taking the opportunity to slap down "all the speculation and incorrect information that has been reported about our company."

Trying Times
1. Peak year for revenue. 2. Projection. Source: Times Co. filings (2000, '06-08); Standard & Poor's ('09-'10 projections); Ad Age ('11 projection). Potential asset sales could reduce future revenue.
Well, yes, any May speculation has proved hollow. But can it last through 2011?

As it turns out, we think the answer is yes, and then some.

The year 2011 matters because that's when the Times Co. has to repay borrowings against a revolving credit facility that's currently got $220 million outstanding. Borrowing more, whether to help repay the revolver or to replace it, could prove expensive -- consider that the company is paying 14% interest on the $250 million loan it took out earlier this year from Mexican businessman Carlos Slim.

Dire situation
Given the company's dwindling revenue and that looming debt, more and more people seem to be concluding that the Ochs-Sulzberger family's control is at risk. As Henry Blodget argued on Silicon Alley Insider this year, "Even if the Sulzbergers still don't want to sell the paper, they may have to give up control to save it."

Michael Wolff told Ad Age he couldn't see a way for the Sulzbergers to hold on. "Within a very short period of time, 12 months, maximum 18 months, there will have to be a control transition at the paper," he said.

It's not even just provocateurs. Mark Potts, a former newspaper reporter and editor who joined the business side and now consults for media clients, called it "one of the great topics of furtive conversation among media junkies."

"I've heard several smart, sane, sober people wonder out loud recently how the Times survives -- in anything resembling its current form, if at all -- beyond a year or two," he said.

But at risk of sounding like Wallace Shawn's Phoenician in "The Princess Bride" -- the guy who wrongly calls many probable outcomes "inconceivable" -- close examination suggests there's no cause for the Sulzbergers to panic.

To the contrary, there are a few reasons to believe the young A.G. Sulzberger now reporting for the metro desk could eventually succeed his father, Arthur Sulzberger Jr., as chairman.

That's certainly the elder Mr. Sulzberger's intent. "We are here to stay," he said at the annual meeting in April, "continuing to build on the legacy begun in 1896 by Adolph Ochs."

And that doesn't look so impossible. At a minimum, making it through 2011 would probably mean Sulzberger family control would be safe until at least 2015, when the next big debts come due.

All media companies, not just the New York Times Co., will need the economy to turn around long before then. "The economy has to get better or every media company is going to face Chapter 11," said Ed Atorino, a Benchmark analyst who covers the Times Co. But some improvement could be enough. "If the economy starts to stabilize and advertising starts to come back, newspapers will start to see a reduced rate of decline and eventually some stabilization," Mr. Atorino said. "In the meantime they'll continue to look at options, like sell some assets or reorganize debt."

So let's say we get a little economic relief. Forecasters do expect the economy to resume tepid growth, with gross domestic product turning positive in the third quarter, followed by a sluggish recovery in the ad market in 2010 or 2011. ZenithOptimedia is forecasting that newspaper-ad-sales declines will moderate to 7% in 2011 from 10% next year.

Recovery long ways off
"2011 is a world away at this point," said Ken Doctor, the industry-vet-turned-analyst at Outsell. "The big question, of course, is what kind of bump it gets from a recovery." Real estate and auto will perform better than they do now, he said, even if some volume never comes back. Luxury advertising should return to print for The New York Times itself.

"Although down, the Times newspaper has not suffered as much in the current recession as other large dailies because of its national position," added John Morton, a longtime newspaper analyst. "And however much advertising the newspaper industry generally will have lost forever when the recovery comes, the Times will suffer less, again because of its national position."

Even if you assume the Times won't stabilize any faster than newspapers as a whole, it's likely to see revenue of $2.22 billion in 2011, according to an Ad Age estimate piggybacking on the ZenithOptimedia forecast, as well as Standard & Poor's Times Co. projections for 2009 and 2010. That $2.2 billion would represent a 34% drop from the peak year of 2000, but it's still a lot of money to work with.

In any recovery, moreover, the Times will enjoy a lower cost base than in the past. The company's operating costs fell $136 million last year and, it estimates, will decline more than $330 million this year. It projected that The Boston Globe, the flagship of its New England Media Group, would lose $85 million this year, but the company has since won $10 million in savings from seven unions and seems poised to wring $10 million out of the Boston Newspaper Guild. The paper may well at least break even once recovery comes to New England; then again, it's already on the block, so it may not be a concern for the Times much longer. In that case the company would have more options, however wrenching they may be, for yet more cuts.

What's more, as we get closer to the June 2011 expiration of the company's big remaining credit facility, the company will theoretically attain better position to sell remaining assets if necessary. Potential asset sales could reduce revenue, of course, but could also raise cash to help the company pay down debt.

Many of the smaller dailies in the company's Regional Newspaper Group actually still have double-digit profit margins, Mr. Morton said. "Although the market value of smaller dailies has dropped everywhere, the declines are not nearly so severe as at large dailies. Assuming the recovery over the next two years or so fails to bring the company the cash it needs, the smaller dailies it owns could be sold -- and after a recovery, however weak for newspapers, probably at higher prices than would prevail now. Time is on the company's side."

Next question: 2015, when $500 million in notes comes due.

How 3 major publishers compare

The Times' S&P credit rating is below that of Gannett, the largest newspaper publisher, but well above that of McClatchy, which is burdened by debt from its 2006 Knight Ridder acquisition.

S&P rating1 Stock price2 and YTD % chg. Market cap Enterprise value
Gannett Co. BB $3.67 -54% $853M $4.7B
New York Times Co. B $5.23 -29% $753M $2.0B
McClatchy Co. CC $0.68 -15% $57M $2.1B

1. Long-term credit rating. Stock price data as of June 25. Market cap = stock price times outstanding shares. EV = market cap plus debt - cash. Source: Bloomberg

Chapter 11

Five major newspaper companies have filed for bankruptcy since December. Newspapers continue to publish while companies restructure debt.

Tribune Co. Real estate mogul Sam Zell led a deal to buy Tribune Co. -- Chicago Tribune, Los Angeles Times, other properties -- for $13.8 billion in December 2007. Tribune, loaded with debt and struggling amid a weak economy and rapidly shrinking newspaper market, filed for Chapter 11 bankruptcy reorganization in December 2008.
Star Tribune Co. Avista Capital Partners, a private-equity firm, bought the Star Tribune of Minneapolis in March 2007 from McClatchy Co. for $530 million, a huge drop from the $1.2 billion McClatchy paid for the paper in 1998. The Avista deal left the Star Tribune with a pile of debt; a bad economy and the weakening newspaper market made things worse. The newspaper filed for bankruptcy reorganization Jan. 15, 2009.

Star Tribune aims to emerge from bankruptcy later this year.

David J. Walsh, senior VP-advertising, told Ad Age: "We haven't lost any advertisers as a result of bankruptcy. The big players [advertisers] understand bankruptcy and what bankruptcy is used for, so it's really not an issue for them."
Journal Register Co. Journal Register Co., owner of the New Haven Register and other papers, went public in 1997 and grew through acquisitions. It ended up laden with debt in a shrinking industry. Journal Register filed for Chapter 11 on Feb. 21, 2009, after reaching agreement with a major of lenders on a pre-negotiated plan for reorganization under which lenders will own the company.
Philadelphia Media Holdings Philadelphia Media Holdings, led by local PR and advertising veteran Brian Tierney, bought the Philadelphia Inquirer and Philadelphia Daily News in June 2006 for $562 million from McClatchy, which sold the papers as part of McClatchy's acquisition of Knight Ridder. Burdened by $390 million in debt and shrinking revenue, Philadelphia Newspapers (Philadelphia Media Holdings) filed for Chapter 11 reorganization Feb. 22, 2009.
Sun-Times Media Group Sun-Times Media Group, formerly Hollinger International, publishes the Sun-Times and community newspapers in Chicago. Former CEO Conrad Black in July 2007 was sentenced to prison for his role in defrauding shareholders and pocketing cash; Black left the company in 2004 after an internal investigation concluded he and other executives had diverted funds for personal benefit. The Sun-Times filed for Chapter 11 reorganization March 31, 2009.

Source: Ad Age DataCenter research

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