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Jan. 22, 2009, 3:06 p.m.

The Times and Mr. Slim

The other day I received a snail mail letter from Spain bearing a 0.78 Euro stamp, signed by one Francisco Miceli, Esq., a “barrister” in Madrid.  He’s offering to split with me $8.8 million in cash that was stashed in a trunk by a purported relative of mine (who unfortunately died, with his whole family, in the 2004 tsunami).

A neuroeconomist recently discovered that it’s the perception of relative poverty, not the actual fact of poverty, that increases the propensity of people to wager their earnings on lottery tickets and the like.  So my friend Mr. Miceli must be feeling relatively poor in these economically challenging times, and is therefore willing to wager actual postage to find suckers, rather than just emailing his overtures for free.

Likewise, Mexican investor Carlos Slim Helú, having yielded the title of world’s richest man recently to Warren Buffett, must be feeling the pinch of poverty,  which may explain why he is taking a gamble on the New York Times Company by investing $250 million.  The Times will pay him 14 percent interest for the use of his cash, and at the end of the six-year deal, Slim can exercise warrants that came with the bonds that would increase his current 6.9 percent stock ownership of the company to more than 17 percent.

Why does the world’s greatest newspaper find itself paying junk-bond interest to a Mexican billionaire?  Clearly, because it, like the Gannett Company, has run out of normal sources of cash, and in effect, it needs to pay off its credit card.

Like Gannett and most companies, the Times has revolving credit agreements it taps as needed for “general corporate purposes.”  The Times has two such credit lines, each for $400 million.  Against these, the Times had borrowed a cumulative $434 million as of September 30.  One of the lines expires in May, and that’s what has generated a flurry of cash-raising activities including attempts to sell and lease back the company’s recently completed headquarters building for up to $225 million, and to sell its minority stake in the Boston Red Sox baseball team, recently valued at $166 million.

In normal times, with sufficient cash flow and equity, lenders would be more than happy to renew such lines of credit.  But banks, in contrast to Mr. Slim, are not in a gambling mood.  The existing lines require a minimum level of stockholders equity or book value.  At the end of 2007, the company stated that its cushion above that requirement was $632 million.  But additional borrowing, potential jumps in retirement obligations stemming from market losses, and potential goodwill write-downs have most likely eliminated that cushion, erasing the option to renew the expiring line or to pay it off  by tapping the other line (a questionable practice, in any case).

So with its back against the wall, the Times turned to Slim, who drove a hard bargain.  Does it get the company out of the woods? Perhaps.  Here’s how it looks in my crystal ball:

Operating cash flow for 2008 (EBITDA: earnings before interest, taxes, depreciation and amortization) will be about $240 million, depending how the fourth quarter turns out.  If revenues slide just 5  percent in 2009 and if the company manages to trim expenses by 10 percent, EBITDA falls to $121 million.  Of that, interest expenses, boosted by the new payouts to Slim, will consume $74 million, and the recently slashed dividend payout will still consume another $25 million, leaving just $22 million of cushion for anything else including capital expenditures — not a viable scenario, except that Slim’s $250 million provides additional breathing room.  But not much, because clearly, revenue is in danger of falling more than 5 percent (at a 10 percent revenue decline, the above picture gets worse by $145 million).  And much of Slim’s cash will likely go to retire the expiring line of credit.

Therefore, expect the Times to redouble its efforts to sell its building and its Sox stake, to trim more than 10 percent of its expenses (a tall order in itself: for the nine months ending Sept. 30, it managed to trim operating costs by only about 2 percent), and to eliminate what’s left of its dividend.  Could it sell any media assets?  The agreement with Slim calls for any “excess proceeds” (anything over $10 million) from asset sales not in the “ordinary course of business” to trigger repayment of such excess proceeds to Slim.  (Selling off the Red Sox stake might be construed by the parties to fall into the “ordinary” category, and the sale and leaseback of the building is treated separately in the deal, so this provision probably just governs potential newspaper asset sales. )  However, given the utter absence of newspaper buyers in today’s environment, and the minimal market valuations recently assigned to Times components by analysists, an asset sale option is unlikely, and in any event, this provision means it would provide no net cash or improved flexibility to the company.  So like Gannett and nearly every other newspaper owner, the Times is now in a position where it must maintain positive cash flow at all costs, and in fact it has much less maneuvering room than Gannett.

POSTED     Jan. 22, 2009, 3:06 p.m.
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