June 27, 2008 5:54 PM

Newspaper industry pressures Denver partners

Regular readers of this blog have been through all of this before, but Saturday's Rocky Mountain News features a quick overview of the newspaper industry troubles and its effects on the Denver partners. Perhaps ironically, the story had to be cut down for space, so I offer you the "extended version" here.

By David Milstead
ROCKY MOUNTAIN NEWS

The continuing decline of the newspaper industry is putting pressure on the owners of Denver's two daily papers.

Tuesday, E.W. Scripps, the owner of the Rocky Mountain News, will spin off its fastest-growing businesses -- its cable networks and Internet sites -- into a new company called Scripps Networks Interactive. Shorn of those pieces, the stock of Cincinnati-based Scripps -- now a local media company, with newspapers and broadcast stations -- is poised to fall by 90 percent or more.

The final quarter of MediaNews Group, the owner of the Denver Post, ends Monday. Major rating agencies say the company is at risk of defaulting on its debt by the end of 2008. The results for the quarter ending Monday may violate the terms of MediaNews' loans, Standard & Poor's analyst Emile Courtney says.

While MediaNews executives say they expect to stay in their lenders' good graces, Courtney says the company's declining cash flow makes it "increasingly likely that MediaNews will pursue a restructuring of some kind."

Scripps and MediaNews are not alone in their struggles. Over the past two weeks, newspaper companies have announced hundreds of job cuts from Palm Beach, Fla., to Hartford, Conn. and all across the Sacramento-based McClatchy chain. Chicago-based Tribune Co. is selling off assets, from the Chicago Cubs to the buildings that house its papers, to stave off default.

The Denver papers's newsrooms, lean for their circulation size to begin with, have lost dozens of employees over the last two years through buyouts and attrition. The Denver Newspaper Agency, which handles the business operations of the papers, has eliminated hundreds of jobs. Still, with double-digit declines in revenue, the owners appeared to post a net loss in the first quarter of 2008 when newsroom expenses are considered.

The newspaper industry's problems are twofold. One is a massive shift in how readers consume news. Ever-growing use of the Internet is contributing to steep declines in paid circulation.

Now, as growth has slowed and a recession seems inevitable, major drivers of advertising -- real estate, automobiles and help-wanted -- are "in a tailspin," said newspaper analyst John Morton of Silver Spring, Md.-based Morton Research.

The tough economy combined with the shift in advertising is causing double-digit revenue declines. McClatchy, the publisher of 30 daily newspapers in cities like Miami; Kansas City; Fort Worth, Texas; and Charlotte, N.C., said its May advertising revenue was 16.6 percent below May 2007. Gannett, the publisher of 85 dailies including USAToday, reported an ad decline of 11 percent.

"There are no magic bullets," Morton said, predicting continuing problems with classified advertising. "I don't think anybody expects it this year, and maybe not next year."

Dean Singleton, CEO of MediaNews, says there are secular changes harming newspapers, but be expects rebounds in other categories. Real estate "was booming" 18 months ago, but is now "off dramatically ... I think that will come back."

"Auto sales will return, and people who sell autos will still sell them in newspapers," he added. "And employment will come back, but it'll come back online, and at lower rates. Our online business will do well, but it won't make up for the loss in print revenue."

Nearly all MediaNews' revenues -- which topped $345 million in the quarter ended Dec. 31 -- come from newspapers. It publishes 57 papers in 12 states with combined circulation of 2.6 million.

Unlike Scripps, Gannett, McClatchy or other public companies who answer to a wide base of shareholders, privately held MediaNews has financed its growth through debt.

Companies that borrow must keep in compliance with certain other requirements, called "covenants," such as having enough earnings to keep the lenders comfortable.

The company had to renegotiate with its lenders in 2007 because it was poised to violate the covenants. Analysts, like S&P's Courtney, believe that once MediaNews tallies its earnings for the quarter that ends Monday, it may violate covenants again.

"That is their opinion," MediaNews' Singleton said. "We're in compliance with our covenants. We've always been in compliance with our covenants, and we'll always be in compliance. These are difficult times, and we know how to operate in difficult times."

Over the last decade, Scripps transformed itself as a company. In 1997, roughly 95 percent of the company's $1.2 billion in revenue came from newspapers and broadcast television. By 2007, its cable networks, which include HGTV and the Food Network, and its Web sites, which include Shopzilla, accounted for 57 percent of $2.5 billion in revenue.

The diverse set of media properties also created a problem for Scripps: Investors who favored growth stocks -- businesses that promised significant gains in revenue and profits -- were sometimes put off by a company that garnered half its revenue from stagnant businesses. As newspaper revenue began to decline, that problem was exacerbated.

"We think that as a result of this separation into two publicly traded companies, each will attract a distinct investor base," said Tim Stautberg, slated to become chief financial officer of E.W. Scripps next week when the spinoff concludes. "Scripps Networks Interactive will attract growth-at-a-reasonable-price investors, and the Scripps newspaper-and-television, the value and dividend-yield investor."

Scripps Networks Interactive and post-split Scripps shares are already trading on a "when-issued" basis, with traders essentially buying and selling the shares with a promise to deliver them when they're available.

Friday, Scripps' "when-issued" shares closed at $3.20. Scripps Networks; Interactive when-issued shares closed at $38.74.

Posted by David Milstead at 5:54 PM | Comments (8)