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Aug. 4, 2014, 2:34 p.m.
Business Models

Ken Doctor: Five questions about Tribune Publishing on its first day of life

The company, including flagship papers in Los Angeles and Chicago, now stands on its own. Can it navigate the next stage of its life — potentially into a new owner?

“We’re getting toward the end of the finish line,” Jack Griffin tells me as he sits in a car whooshing to an appearance. At that point, last week, he’d spent seven of the past 10 days doing an equity road show, touting his new Tribune Publishing, which begins trading tomorrow. “Monday, we split the company. Tuesday, we start trading. On Wednesday, I have a Tribune board meeting, and then on Thursday, my first town hall at the Chicago Tribune. Then, I head to L.A. Then, I’ll spend the next three weeks on the road visiting Tribune cities.”

Griffin’s tour and return to a high-profile, high-digital-opportunity CEO position is a redemption. Highly successful in building Meredith’s ad businesses, he got tripped up in taking on the top job at Time Inc. in 2010. Time Inc. wasn’t ready for Griffin’s change plans, and the insular company rejected the transplant; he left five months later. Now Griffin takes over a separate Tribune just months after Joe Ripp has taken over the new Time Inc., itself just separated from the mothership of a diversified media company. The challenges they face are increasingly shared by new CEOs of standalone newspaper-based companies — a group that was joined last week by Scripps’ Tim Stautberg, as he takes on leadership of the new newspaper-based Journal Media.

tribune-publishing-logoOn his stops in Tribune cities like Hartford, Baltimore, Orlando, and Fort Lauderdale, Griffin will run into a lot of familiar faces, and insiders say he’s got a knack for connecting those faces with names and useful ideas. He’s been a key strategist in the recent Tribune restructuring as a consultant, working through his Empirical Media company. He’s already met many of the company’s leaders, and had a hand in picking some. Now they want to know his vision.

Today’s split concludes one odyssey and and launches another. The hell of Sam Zell’s tenure has receded, but it has marked Tribune newspapers for the long term. From 2007, with his suspect leveraging of employee stock ownership program laws to finance a purchase of the company, to a bankruptcy filed one scant year later, to four years of bankruptcy itself, Tribune’s newspapers, TV operations, and decreasing workforce all suffered. The company has held together in some places — especially dual flagships Chicago and Los Angeles — better than others, but the loss of news standing and community service throughout the country is palpable.

It’s easy to be tired of this story, which through bankruptcy has seemed endless. But Tribune remains among the top five newspaper-based companies in the U.S., and the only chain heavily based in big metro areas. Its future, and how it forms that future, is important to millions of people in those cities, and its testing of new models is important to the industry. It’s also easy to dismiss this next Tribune as just one more step preceding another sale. That will likely happen — but it’s hard to know when. Tribune’s controlling owners are financial companies, with no particular appetite for long-term operation of a media company. However, the tax-free nature of the spinoff, detailed below, throws up shorter-term hurdles to selling.

In the meantime, whether that’s measured in long months or short years, the performance and model testing done by Jack Griffin’s re-energized crew (and new board) is what we need to watch into 2015.

Of course, Tribune isn’t alone there. The carnage across the U.S. newspaper landscape is widespread. It’s just that Tribune’s decline has been so theatrical. Now, with Tribune Publishing finally spun off (from a company now to be known as Tribune Media, home of the broadcast and digital businesses) we can all move on to the next act.

On day one of Tribune Publishing, let’s look at five key questions about the new company.

Will Tribune Publishing sell itself?

This parlor game only gets curiouser and curiouser. It was only last summer that we played in earnest. AT the time, the increasing likeliness of a Koch Brothers bid for Tribune set the world and Twitter on fire. The financial companies, who now control 40 percent of Tribune’s stock, never formally put the company on the market, though there was much anticipation that it would do so.

Why did what seemed like a likely go-to-market not happen? Chalk it up to two factors. One, there was what we can call Koch anxiety, stoked by political protests with potential implications for those owners’ core businesses. Second, Tribune’s tax strategists figured out a way forward that provides its owners first with a tax-free separation of assets. In addition, if and when, Tribune Publishing is sold, the company won’t incur significant taxes on its gain.

There’s a rub, of course. One reason it’s taken Tribune about a year to complete its separation of TV/digital and print assets is the tax complication. The company is controlled by its three former senior debt holders, though it is publicly traded, via the pink sheets. The “private letter” it received from the Internal Revenue Service in April includes a few hitches to selling the newspapers:

  • Its three major owners — Oaktree Capital Management (22 percent interest), Angelo, Gordon & Co., and JPMorgan Chase (each with 9 percent) — are constrained in offering their shares on the public markets for six months. The 40 percent of the company that they collectively own must be held for 180 days to maintain the tax-free nature of the spin, the IRS says.
  • Any potential buyers who had conversations with Tribune or its agents before the split can’t buy a majority stake of the company, without tripping up those important tax-free features of the split. So who might that preclude from buying up some of the 60 percent publicly traded float of the company in the next six months, or some of the controlling companies’ shares after their own six-month lock-up ends? We don’t know, but Tribune’s attorneys do. It’s not public information.

We won’t get into potential buyers here; there’s plenty of time for that. There will be the perennial Rupert question. The News Corp Chairman recently tweeted about his inability to bid for Tribune given FCC cross-ownership rules. It’s unlikely that Murdoch could get the waivers he would need from the current FCC board. The next presidential election, though, is two years’ away, and the party in the White House controls a majority of the board. So, as we get into 2017, all bets are off on the FCC complexion. Murdoch is used to play a waiting game, and as we can see from Tribune’s own uncertain six- to 24-month timeline, he could re-enter the sweepstakes at some point.

Will Tribune Publishing buy newspapers?

Griffin caught some eyes last week when he told Crain’s Lynne Marek: “We think there are more of these opportunities around the country that are geographically adjacent to where we run big papers and big brands, and that over time we can achieve similar kinds of consolidation and acquisition opportunities that are going to add meaningfully to our footprint and our revenue and our profit.” Tribune being a buyer, of course, would seem to stand the Tribune-for-sale story on its head. But it doesn’t, really; both can be true over time.

In the short term, there are lots of buying opportunities out there. Tribune itself bought Annapolis-area properties, 45 minutes from its Baltimore Sun, in May. Clustering of print properties within metro areas is nothing new; the Sun, just as one metro paper, has been doing that for 20 years. Now in this time of great print consolidation — the amount of print ad money in metro areas is shrinking markedly, but is still large overall — clustering takes on a new potential. More sellers see this as a time to get out, and companies with reorganized, centralized print/digital publishing businesses can see the cost efficiencies of adding new readers and new products — as long as the price pencils out.

Tribune has only about $50 million in cash, but it has access to as much as several hundred million more in financing. Further, it carries none of the newsroom employee pension obligations; those remain with Tribune Media.

It does have the ability to put cash into small acquisitions, and is looking in the news tech space as well as at clustering opportunities. In some markets, like that of volatile L.A., it’s ironic that Tribune’s Los Angeles Times may be a relative rock of stability come Tuesday. Digital First Media’s Los Angeles News Group will be on the market soon, with numerous overlapping properties of uneven value. South and east, Aaron Kushner’s new Freedom has rolled up the Riverside Press-Enterprise and administered all manner of editorial and business electroshock in and around its core Orange County Register. Given the financial pressures on Kushner, we could see his properties, in whole or in part, become part of the SoCal rollup I’ve long said is inevitable.

How will Tribune grow?

Tribune will double down on the key chapters from dailies’ latest playbook. That means goosing reader revenue and greatly expanding the nature of products offered advertisers.

All eight of Tribune’s main papers have paywalls, but they vary among hard, metered, and in-between. Tribune will put a fairly uniform subscriber/membership program in place at all by early next year, in hopes of optimizing pricing. I talked with Griffin about the cracks in the paywall strategies we’re now seeing, as some companies, Gannett included, have gone negative in circulation revenue. He talked about some companies whose “price increases had been too big” and said he thought “mid-single digit increases” were the sweet spot, “as long as you [continue] to deliver more value.” That tension between pricing up and retaining enough print volume will be key to Tribune Publishing’s first year.

On the ad side, Griffin knows the new expanded landscape better than other newspaper company CEOs. The fields of content marketing and marketing services, which daily newspaper companies have firmly embraced (“The newsonomics of selling Main Street”), are squarely in his wheelhouse. He is credited with being a thought leader who convinced an old-line magazine company, Meredith, to invest in both almost 20 years ago. Now, the latest iteration of that effort, Meredith Xcelerated Marketing remains a model for publishers trying to get into the game.

So branded content is rolling out as a new ad product offering for the company, staffed out of Chicago and L.A. The initiative produces text, photography, and video for advertisers. Tribune 435, the Chicago Tribune’s marketing services effort first innovated by now executive vice president of digital Bill Adee, is similar to marketing services efforts like GateHouse’s Propel, Hearst’s Local Edge, and Digital First Media’s Ad Taxi. Each of the Tribune newspapers will operate a Tribune 435-like business, with local branding.

Those kinds of services are logical extensions of the old space-selling local ad business. It’s a long-term business, though, and one that builds more slowly than cash-needy publishers would like. Another issue, of course, is that everyone is seeing this new opportunity with small and medium local businesses; competitors are coming from all sides.

Tribune is also pushing on a new area, syndication. It claimed the half of the McClatchy Tribune Wire Service that it didn’t own last year, and has merged it into the Tribune Content Agency. That wire pumps out lots of content from Tribune’s own papers and a pipeline of others — though some of those papers have pulled their content streams, concerned about channel conflict, and more may do so.

Where will Tribune Content Agency growth come from? “It’s going to come from print and digital,” says Griffin. “Right now, we’re English-only and we’ve starting to work on translations. We just entered into a significant agreement with one of the big web portals where they are paying us in seven figures.”

Given that overall revenues are still falling at roughly a 3 to 4 percent rate, the challenge here is clear. It’s not to simply innovate — it’s to innovate at scale. That’s what a Tribune Publishing turnaround demands.

Will there be more newsroom cuts?

See “growth” above. The inconvenient truth: The only way that Tribune and its peers have managed to maintain profitability over the past seven years to cut and cut some more.

Consider that Tribune’s publishing arm has reduced operating costs by about $250 million since 2011; a recent report projects another $65 million in expense cuts this year. And now it has to pay debt on a dividend to Tribune Media and its own dividend to shareholders, further complicating its finances (“The newsonomics of Tribune’s print orphanage”).

Without growing revenues, cuts remain a fundamental strategy. Some CEOs have been smarter with the scalpel than others, but all have cut newsroom jobs to some degree.

Tribune’s cuts outside Chicago and L.A. have been deeper, and there is a profound question of how much more all-access reader revenue can be yielded out of products that have been cut too deeply. Griffin understands that issue; how he balances that quality/profit question in the 2015 budget will be an early indicator of his strategy.

What’s Tribune Publishing worth, come Tuesday?

As it goes on the market, that market value is a big question. One financial analyst recently pegged it at an ambitious $635 million; that number constitutes about 10 percent of the combined company’s worth pre-split. Why is that a tad high?

Within bankruptcy, about two years ago, Lazard valued the newspaper side of the business at $623 million. In the two years since, the Tribune publishing operations have shed a lot of revenue. One comparison of its operating income: For the first quarter of 2014, it was $38.66 million down 17 percent year-over-year from 2013 Q1’s $46.39 million. More decisively, the newspaper side assets have been shorn, stripped of the real estate under and near them and of their stakes in the more profitable digital classifieds businesses; Tribune Publishing has to lease back its offices, part of that larger new lease on publishing life. We can figure that about half of Lazard’s 2012 estimate was tied to those digital profits and the papers’ real estate.

How much the company is really worth is, for now, academic, given its the short-term strictures on selling it — but that number is worth keeping in mind going forward.

POSTED     Aug. 4, 2014, 2:34 p.m.
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