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June 29, 2009, 10 a.m.

Could strategic bankruptcies be needed to transform newspapers?

bankruptcyContinuing on a theme: I’ve been discussing the apparent disconnect between the quality of a news site’s design (as perceived and rated by professionals) and how much time people spend there; as well as the kinds of things that count more than design: reader engagement, interaction, community, personality — real life behind and around the content.

In a comment on the second post, Phil Buckley, whose commentary I had quoted and linked to, asked: “If you were starting a news organization today, where would put your initial efforts?”

I like this, because it’s the key question that all news organizations should be asking themselves.  If tackled correctly, it can be a transformative question, a way to self-disrupt the organization, a way to get through the wormhole of reinvention that newspapers are facing, and come out on the other side with a workable business model.

And indeed, forward-thinking news organizations are asking it. But in some news organizations (like Phil, I try to call them that instead of newspapers), the process of dealing with this question leads to an uncomfortable realization: the business model for news in the future is so radically different from today’s legacy newspaper business that there is no way to get from here to there without “a major restructuring event,” which is a euphemism for bankruptcy.

In other words, the viable business model they can glimpse — consisting, perhaps, of a weekend-only or twice-weekly printed byproduct of an online-first publishing operation — represents such a downsizing of the enterprise that it can’t possibly carry the company’s legacy debt load, so the only way to make the transition is first file Chapter 11.

This means that paradoxically, the publishers who have already gone into the bankruptcy stage, if they have good answers to Phil’s question, may be closer to sustainable business models than those who are still paying their bankers.

An article in The Deal Magazine by Richard Morgan entitled “The default option” explores in detail the impact that upcoming debt maturities will have on Gannett, the nation’s largest publisher of daily newspapers.

Gannett, says Morgan, faces a slew of bond maturities in mid-2011, and very little prospect of being able to raise sufficient cash to cover that obligation.  He quotes an anonymous expert on “distressed debt”: “They painted themselves into a corner. They have to raise more than $400 million between now and the middle of 2011 in a market where, frankly, many of their bondholders would rather they default.” Gannett’s debt rating has been lowered to junk-bond status and it is in danger of violating at least one debt covenant later this year. (Those inclined to speculation can find in the story a “win-win” strategy to profit from Gannett’s predicament with the help of credit default swaps.)

Other newspaper firms with high debt loads have similar predicaments exacerbated by several years of revenue declines that culminated in a mind-boggling 29 percent revenue drop for the industry as a whole in the first quarter of 2009.

The number-two publisher (by circulation), Tribune, is already in bankruptcy. McClatchy (number 4) is technically in default for seeking relief from bondholders by means of an exchange offer relating to $1.15 billion in bonds that met little acceptance. MediaNews Group (number 6) arranged a forbearance agreement with lenders back in April, indicating a technical default as well. MediaNews is privately held and has not reported subsequent arrangements, but it has a total of about $1 billion in debt.  (Followup July 1:  Westword has posted a story on MediaNews’ debt, mentioning a source who discussed with Debtwire a potential plan for the company to go through a pre-packaged bankruptcy, in which most of its debt would be converted to equity.  Followup 2: late on July 1, the company issued a release saying that the Debtwire report is “inaccurate in almost all respects,” that the company “remains in compliance with bank agreements while refinancing discussions continue,” and that the company has not proposed filing for bankruptcy.   The company says: “As previously reported, MNG is in discussions with its bank lenders to restructure its balance sheet, including an exchange of some of its bank debt for equity in the company. Proposals to the company’s lenders do not include a change in control of the company, nor do they include proposals for any bankruptcy filings, as the rumors suggest.”)

The New York Times Company (number 7), has been taking a variety of drastic steps to avoid defaults, including a pricy loan from Mexico’s Carlos Slim and attempts to sell non-core assets, particularly those in New England (the company’s minority stake in the Red Sox baseball team, the Boston Globe, and the Worcester Telegram & Gazette). Lee Enterprises (number 8) obtained waivers back in January to postpone a debt default situation relating to $306 million of its $1.1 billion debt.

It’s not likely all these operations can avoid eventual bankruptcy. Farther down the list, other publishers have already made the trip to the courthouse: the Journal-Register Company (number 18), Minneapolis Star-Tribune (the number 4 independent, non-group newspaper), Chicago’s Sun-Times group (number 17), and the Philadelphia Inquirer (the number 3 independent).

Often, corporations staring the repo man in the face opt for strategic bankruptcies that allow time for operations to be rationally resized, or sold off, and potentially for a new, viable organization to emerge.  The current restructuring of the auto industry certainly falls into this category. Resistance to this notion comes, of course, from current owners who are generally left with next to nothing — but for most of the aforementioned newspaper publishers, their stock prices are already in the penny range, or close to it, and the market value of owner equity is zero, or close to it (as indicated by the suggested negative price to be paid by whoever is willing to take the Boston Globe off the hands of the New York Times, which originally paid about $1.3 billlion for it.)

If we experience a rash of bankruptcies among these larger publishing groups, the likely outcome is that the underlying newspaper assets will be sold individually, often to local groups wishing to regain control of their local news enterprise. If those groups are willing to follow through with the necessary investments needed to turn their local papers into digital-first news enterprises, that could be a good outcome for the public at large. In fact, it might be an essential path, because the current owners have no resources or flexibility left to complete the needed transformation.

I realize I’ve digressed from Phil’s question, and I’ll return to it in a day or two, but perhaps part of the answer is that “a major restructuring event” is in fact a necessary “initial effort.”

POSTED     June 29, 2009, 10 a.m.
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