Think newspapers have it rough now? Wait until the bottom really drops out.
Four years ago, the Journal Register (JRC) was a group of thriving community newspapers with a stock price above $25 and a $1 billion market cap. Now, it’s a shell of a company whose equity is worth all of $10 million, is getting booted off the New York Stock Exchange, and whose stock is trading at $0.16 (yes, that’s 16 cents).
Could it be that the Journal Register was just horrifically mismanaged and that other newspapers will find a happier route out of the current Craigslist-and-Internet-news-sponsored mess? It could be. As newspaper guru Alan Mutter notes (below), what is delivering the death-blow to JRC is its gigantic pile of debt.
On the other hand, other newspapers have piles of debt, too, and their managements seem similarly disinclined to open their eyes to the long-term reality. So perhaps the Journal Register is just a sign of things to come. McClatchy (MNI), Gannett (GCI), Tribune, New York Times (NYT), Belo, Lee, et al, take note.
Alan Mutter (from Reflections of a Newsosaur):
What went wrong at JRC
Teetering near default on a tower of debt and days from being booted off the Big Board, Journal Register Co. shows how strategic missteps and bad luck can imperil even as good a business as this highly profitable chain of community newspapers.
For all that’s wrong with JRC – and there is a quite lot, to be sure – the company’s 19.3% operating profit not only compares quite favourably with those of several of the largest Fortune 500 corporations but actually surpasses the margins of such giants as Chevron (18.5%), Wal-Mart (7.5%) and General Motors (3.5%).
The ability of JRC to continue generating rich profits at a time of unprecedented contraction in the newspaper business is the direct legacy of the rigorous expense management enforced by Robert Jelenic, the chief executive who ran the company for two decades until he resigned in November to undergo cancer treatment.
In addition to leaving JRC with some of the leanest-running newspapers in the land, Mr. Jelenic also left the company with the hefty $628.4 million in debt that now threatens to force it into bankruptcy. Most of the debt results from one bold, but less than successful, acquisition he undertook in 2004 in an effort to keep the company’s sales, profits and stock price growing.
Not only did the transaction prove over time to be a serious miscalculation, but a steep drop in JRC’s sales in the last two years has made it increasingly unlikely that the company can generate enough profits in the future to service its ponderous debt.
Between 2005 and 2007, JRC’s sales tumbled 20.2% to $463.2 million, a drop nearly 2½ times greater than the over-all industry decline of 8.2% in the same period. (Some revenue was eliminated in JRC’s sale of a few modest operating units, but the volume of the discontinued operations comes nowhere close to accounting for the disparity between the performance of the company and the industry as a whole.)
Caught between high debt and declining sales, the company today finds itself in a world of hurt:
:: JRC’s share price has fallen by 99% from a high of $21.84 in 2004 to $0.265 Friday at the New York Stock Exchange. The Big Board plans to ban the shares from trading this week, because the value of the company is too low to meet the minimum listing standards.
:: The company’s debt, which amounts to an untenable seven times its operating earnings for the last 12 months, is now rated at Caa1 by Moody’s Investor Services, which means the rating agency believes the company has better than a 1 in 3 chance of default. Moody’s is concerned that the company cannot generate enough cash to cover the debt repayments scheduled for 2009.
:: The largest portion of the debt that threatens to force JRC into bankruptcy resulted from the acquisition for $415 million in 2004 of a group of community papers concentrated around economically distressed Detroit. To date, the company has been forced to write off $215 million, or nearly 52%, of the value of those assets.
:: An investment banker has been hired to explore the sale of some or all of the company’s assets, but few parties are interested in acquiring newspapers these days, given the the unsettled outlook for the industry. Further, it is questionable whether a buyer, if one materialises, would pay much more than the 7x earnings necessary to extinguish the company’s debt. This fear has caused investors to hammer the stock to the point it is all but worthless.
Continue reading Alan’s dissection of JRC (and learn that, despite the cash crunch and impending bankruptcy, the company still paid its CEO $6.3 million in 2007)…
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