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By Thomas Lifson
July 17, 2008
It's about as much fun being a newspaper publisher as an airline president these days, so Arthur Ochs "Pinch" Sulzberger, Jr. of the New York Times deserves our sympathy. Last quarter's earnings were dreadful. Earnings per share from continuing operations were down almost 75% from the previous quarter as newspaper advertising revenue declined over 10% -- a decline which according to the May earnings report accelerated to 11.9%. Just last week, Lehman Brothers forecast that in a year, its common stock would decline in value by almost half.
Pinch is trying to save the independence of the family-controlled publishing concern (regarded within the family as a public trust), but in the process has put a legendary newspaper empire on a path of decline, eating into capital to pay dividends to the shareholders, paying off employees who accept buyouts, and hoping that the comparatively small internet operations of the company will someday grow enough to balance the decline of the newspaper business.
If he succeeds, the New York Times Company will end not with a bang, but a whimper: Liquidated -- with all stake holders addressed, if not fully content. It is a dreadful comedown for a career that began almost regally.
Pinch represents the fifth generation male heir of the Ochs/Sulzberger family to head the corporation. In 1987, at the age of 35, Pinch became assistant publisher to his publisher father "Punch" Sulzberger, succeeding him in 1992. Today he is also the chairman of the board. Pinch inherited the pre-eminent newspaper in America and arguably the world -- a robustly growing and diversifying media conglomerate.
A family trust elects 10 of 15 directors, through control of 88% of the Class B shares of the New York Times Company (NYTCo). Class A shareholders, who supply roughly 90% of the firm's capital, elect the remaining 5 directors.
If all shareholders carried equal voting weight, the company would long ago have been a candidate for acquisition or breakup at the tender mercies of Wall Street fund managers. NYTCo has underperforming assets. The core newspaper franchise maintains its residual magic as a brand name; and within the lush niche -- urban professional high income people of sophisticated tastes and liberal politics -- the Times has carefully cultivated, its name remains incomparably authoritative.
It remains the best-known American newspaper worldwide. It is focused on its niche and tends to their needs, prejudices, and disposable income. Even those who criticize the media institution's editorial slant - as a recent Vanity Fair piece describes in detail - love to hate it.
Buyers with larger and more diverse media platforms, such as Google and Bloomberg (even Rupert Murdoch has been mentioned in a Times blog) could better utilize the information-gathering potential of the existing journalistic organization, while bringing more flair and money to the project of competing in the declining print newspaper business.
Two different Wall Street funds have already openly made runs at a proxy fight among class A shareholders, and one group succeeded in forcing the company to allow its representatives two seats on an expanded board. The family still maintains control, but outsiders now have access to internal data.
Keeping the family happy
But as long as the family supports his tenure as publisher and chairman, Pinch Sulzberger's job is secure. And it appears that he has attended to their needs zealously.
Despite collapsing advertising revenues, layoffs, and buyouts, (including a catastrophic $814.4 million writeoff of newspaper properties in New England purchased when the internet handwriting was already on the wall) and downgrades of its debt to uncomfortably close to junk status, Pinch Sulzberger increased the dividend almost a third in March last year, from 17.5 cents to 23 cents a share.
Family members hold about 10% of the overall equity through Class B shares, and hold another 19% of the equity via family holdings of Class A common shares, so almost 30% of the $33.3 million in dividends sent out in the first quarter of 2008 went to the family, while the company's equity accounts took a hit for $28.2 million, according to the company's most recent SEC form 10Q.
Unfortunately, keeping that enhanced dividend flowing may turn out to be a bigger challenge than Pinch and his CEO Janet Robinson believed. Lehman Brothers last week questioned whether it could be maintained, and the company's efforts to control costs, touted as a source of cash savings, have so far not yielded the forecast economies. In 2007, CEO Janet Robinson announced a planned reduction in their annual cost base of $230 million in 2008 and 2009, excluding the effects of inflation and one-time costs. That works out to $28.8 million per quarter over the two years, yet operating costs before depreciation and amortization decreased less than half of that in the first quarter of 2008.
Those cost savings are proving very painful and expensive. The company has tried offering inducements to longtime journalists to retire, recognized $11.2 million dollars in expenses last quarter alone. (In addition, as of 3/31/08, the company's balance sheet also carried a further $21 million as "accrued expenses" of buyouts.)
But an internal memo from the paper's assistant managing editor Bill Schmidt, leaked to the New York Observer, told news employees that the buyouts were not enough to lure a sufficient number of volunteers, writing that the company "approach[es] it [layoffs] with a heavy heart."
The Murdoch threat
While funds drain away from NYTCo, Rupert Murdoch swims circles around the floundering flagship paper. He has purchased the Wall Street Journal with the aim of making it more of a general news national paper, targeting the Times' national edition's readers and advertisers. His New York Post already outsells the Times in New York City itself, and News Corp. is now reported to be in talks with the New York Daily News to combine business operations. With the financial muscle to cut prices and steal advertisers away from the Times national and metropolitan editions, Murdoch can force the Times to cut its own prices for the advertisers and readers who remain with it, further pressuring circulation revenue and readership.
The future looks grim indeed for Pinch Sulzberger and the company he leads. Slowly accelerating decline is the best case scenario at the moment. For a man born to wealth unto the generations, prominence, prestige, and a legacy to uphold, it must be humbling to see the future of the family patrimony crumbling before him.
Thomas Lifson is the editor and publisher of American Thinker.
By Thomas Lifson
January 26, 2009
Arthur Ochs "Pinch" Sulzberger Jr. has driven the proudest institution in journalism to the doorstep of ruin, its corporate debt earning the humiliating label of "junk" from Moody's Investors Services. And it wasn't just a slide over the line, the company tumbled three steps below investment grade.
Even worse is Moody's negative expectation, meaning further downgrades are on the horizon in the next 12-18 months. Moody's has withdrawn its rating for NYTCo commercial paper, its unsecured corporate borrowing. Nobody in his right mind is going to loan the company money that way anymore.
The terms of the company's $250 million loan from 2 companies controlled by Carlos Slim Helú, the Mexican billionaire the paper once scorned, force the Times to pay over 14% to borrow money. The added interest cost, especially the 11% that is paid in cash (the other 3% gets added to the debt balance, just like a credit card bill that can't be paid in full), is one factor in Moody's downgrade:
"In Moody's opinion, earnings pressure and higher cash interest costs will limit free cash flow generation in each of the next two years notwithstanding a significant reduction in capital spending, and the recent 74% cut in the dividend."
"Earnings pressure" refers to the accelerating pace of revenue decline, and Pinch's inability to cut costs at anywhere near the same pace as the rate of revenue decline.
Only recently has the company tightened some rather lavish expense account practices:
Shareholders have lost between 80 and 90 percent of their investment in the company's common stock over the last 5 years, while the Times journos have merrily enjoyed the elitist lifestyle bubble on the company dime in Manhattan and capitals around the world.
- News staff can no longer take each other out for drinks and charge it to the company! They had a great deal going there, going out with your colleagues for drinks and maybe dinner.
- New per meal expense limits: $50 for dinner, $30 for lunch, $15 for breakfast. The high end places are now out of bounds. Apparently earlier, they weren't.
- And even after the memo announcing expense account cuts was issued, Maureen Dowd wrote a story about "spa guilt" among the rich, deducting the expenses she incurred at a luxury spa.
There is reason for the heirs to the Sulzberger/Ochs fortune to be concerned for the survival of the business as an independent ongoing entity under family control. I have been warning for years that Pinch's stewardship was on the road to destroying the family fortune, defaulting on the "trust" they so proudly embraced -- keeping the Times an independent voice committed to excellence.
Few New York families could rival their patrician status. Materially comfortable in an expensive city and able to move with ease at the highest levels, custodians of the mightiest of public voices, members of the family were pillars of the power elite in New York. Now, they must contemplate financial ruin, or at least handing the company over to their social and moral inferiors, salvaging at best a tiny portion of the vast fortune that once supported them handsomely.
Moody's is clearly worried about the company's liquidity, giving it a Speculative Grade Liquidity rating SGL-3. The company faces some substantial debts coming due through 2011. Moody's believes the Slim Money and other sources of cash will cover the 2009 debts, and the majority of a $250 million note coming due in March, 2010. But it has a $400 million debt rollover coming due in June, 2011. To pay that note off, the company will have to scrape together whatever cash it can drag out of its operations, and add money the company hopes to generate by selling (and leasing back) its interest in its headquarters building, and selling its interest in the Boston Red Sox, the New England newspapers, and perhaps -- its last salable asset -- the About.com group.
Plainly, the game is survival now. The core newspaper business is struggling for life everywhere, but the New York Times had special assets, including an unsurpassed brand name and a national presence. It might have been possible for a gifted leader to have steered the Times on a better course. Pinch publicly reassured his cousins that "innovative products and services across media platforms" would secure a bright future for the company. But his sweet words have proven to be blather.
His strategies have been poorly conceived and incompetently implemented. Pinch paid roughly half a billion dollars for About.com and a few other web properties that do not generate anything like a 14% return (the company's marginal cost of capital at the moment). He squandered over a billion dollars buying New England newspaper properties, now nearly valueless, except for the interest the Boston Globe had in the Red Sox.
In an unbelievably craven move, Pinch actually raised the dividend by almost a third in 2007, in the face of declining revenues and profits. This meant that the controlling shareholders, his family, received a one third spike in their income, as if to reassure that matters were under control. Or, if one were cynical, they got some of their money out while the company was still solvent.
Either way, the company is significantly weakened now, forced to strip itself of assets to meet its debts, and facing a collapsing market for newspaper advertising. The billion and a half dollars Pinch unwisely spent on acquisitions would go a long way right now.
Only a miracle -- a sudden rebound in the economy, the end of the internet, and a brand new mindset in the leadership of the company -- can save the company now. And I wouldn't bet on that trifecta. A "negative outlook" says it all. The handwriting is not just on the wall, it is in the securities rating.
Thomas Lifson is the editor and publisher of American Thinker.