Nieman Foundation at Harvard
Talk about spin. Two of America’s once-iconic publishers are about to be spun. Spun off, that is, from parent companies that have fallen out of love with print and in love with moving pictures. The names of the Chicago Tribune and Time magazine may invoke the publishing golden age birthed by the Colonel McCormicks and Henry Luces, but these publishing divisions today are more than tarnished. They’ve become liabilities, weights on future enterprise,and anchors of low profitability as advertising revenues continue to be eaten away by the Googles and Facebooks of this era. Tribune Company and Time Warner will move on without their namesakes, a plaque or two in the lobby remaining behind to commemorate their illustrious histories.
What we’re seeing unfold this year is an orphaning of distressed publishing assets: setting them adrift in an inhospitable business climate, thinly clothed and with a heavy bag. Call it publishing orphanage. It’s a noteworthy moment in an almost decade-long reckoning with the long slide in both the newspaper and magazine industries.
Both Time Warner and Tribune are working through all the financial and legal issues en route to hiving off their publishing assets from their core TV/movies/digital businesses. Both should have the process completed by the middle of the year, probably a little earlier. Both are following in the footsteps of other media splits, including 2013’s News Corp. and 2007’s Belo and Scripps. But both are planning on putting more of a burden on their publishing businesses than we’ve seen in previous splits, with Tribune’s approach standing out as particularly Dickensian.
In essence, it’s a newer, harsher reality for legacy news operations forced to live on their own. In part, that’s a reflection of the challenges that the non-print sides of Time Warner and Tribune face. Adjusted operating income was down in 2013 for Time Warner’s HBO and Turner divisions and at Tribune’s broadcast operations. Yes, publishing may be distressed — but the TV/video path forward is chockful of competitors too, taking money and customers away at every opportunity.
Both Time Warner and Tribune are assigning significant debt to their split-off companies. But debt is only part of the story. The burdens being placed on standalone Time Inc. and Tribune Publishing are several-fold:
To be fair, Tribune has noted in its filings that parent “Tribune is also expected to retain most of its pension assets and liabilities.” We’ll have to wait and see what “most” means.
So, to the question of the day: What difference will the split arrangements have on the journalism that the Los Angeles Times, Chicago Tribune, and Tribune’s six other metro dailies produce? What are the chances that Time Inc.’s Time, Fortune, Sports Illustrated, and Entertainment Weekly, among others, will be able to find a high-quality print/digital way forward?
Will the readers of those publications be affected by the new financial obligations of the publishers? The answer is painfully simple: Yes.
By one measure, the new debt put on the publishing companies is reasonable. Time Warner’s overall debt is $18.3 billion; it is assigning 7 percent of it to Time Inc. Tribune’s overall debt is $4.1 billion, most of which was incurred in its purchase of Local TV stations last fall; it is assigning 8 percent of it to Tribune Publishing. Both new companies, as others have argued, have sufficient cash flow to make the debt service. We can also add to the justification that as divisions of larger media companies, both publishing divisions contributed to debt service all along.
But that argument ignores the reality of 2014. Both publishers have only remained profitable by significant staff cutting. Given that revenues will continue to be down this year for both, somewhere in the mid single digit range, they’ll have to continue cutting costs and staff to maintain profitability. The new debt service and lease obligations won’t break their backs, but they’ll be added new weight on backs already bent. That’s in contrast to those other recent publishing splits which were more friendly to the print half.
The most recent and instructive parallel is last year’s News Corp. split. Pushed by shareholders and Hackgate fallout to split his baby, Rupert Murdoch steered $2.6 billion in cash to the newspaper-heavy company and freed 21st Century Fox to head off into its future. The new News Corp wasn’t assigned any debt, didn’t have to pay a dividend, and kept all the real estate underneath its newspapers. Further, Murdoch threw Fox Sports Australia and digital real estate services into the new “newspaper” company, giving it a couple of growth drivers.
Seven years ago, when Belo split off its newspapers as A.H. Belo, it assigned no debt to the newspaper split. Also in 2007, Scripps separated out its newspaper and broadcast properties from its high-flying cable ones. In that case, the new cable business, Scripps Network Interactive, got $325 million of the debt and E.W. Scripps, the new newspaper/broadcast entity, got $50 million of it. Neither Scripps nor Belo separated the real estate from the legacy operations.
Why? All three companies realized that the standalone newspaper entities needed every dollar possible to find a future. Arguably, the editorial operations of The Wall Street Journal, The Dallas Morning News, and Naples Daily News are better off for it today. Will we be able to say the same when the Chicago Tribune, L.A. Times, Baltimore Sun, and Orlando Sentinel are set adrift?
A few inquiring minds want to know. One of those is Henry Waxman, the Democratic ranking member on the House Energy and Commerce Committee. Waxman raised an alarm about the Tribune’s assignment of debt and dividend to its spinoff back in December. While newspaper business matters generally fall outside the purview of Congress and regulators, the committee does provide oversight of the Federal Communications Commission. Waxman’s interest, though, is more local: The long time L.A. congressman worries about the future of the local L.A. Times. So Waxman has met with Tribune CEO Peter Liguori, and formally requested documents related to many of the burdens I listed above. There have likely been other staff interactions, and there may be more to come.
Waxman is trying to bring a political moral suasion to the Trib spinoff, asking what indeed will be the impact of the Tribune Company’s stripping assets of every kind — terrestrial, digital, and financial — from the newspapers.
But common sense here is paramount. Almost all legacy publishing companies are, to use the polite term, mature enterprises. More precisely, year after year, they take in less money than they did the year before and the year before that. There’s no extra cash lying around. The meager cash flows of these companies goes to:
Think of these four as mouths to feed. Publishers must ration food among them, and there’s not enough. So the short answer to the question: Yes, imposing new costs — debt service, dividend payments, or lease costs — on these spinoffs will make life harder. While life gets harder, more staff — including more journalists — get cut. The road ahead for Tribune Publishing and Time Inc. will be harder if the proposed debt and dividend plans proceed. The journalistic output is likely to suffer. Readers and communities will get less and less experienced reporting.
Tribune has some cash, but it’s not expected to give any of it to the publishing entity. The most recent financials we have for Tribune show that the company has about $700 million in cash and cash equivalents.
Now let’s look at the percentage of profits that may need to go to servicing debt and how much debt service could equal in terms of jobs. Overall, Tribune Publishing generated $150 million in operating profit for the first three quarters of the year, so we can extrapolate $200 million for the full year 2013. Or course, what generated those profits is cost-cutting. To get to that level of profit, it reduced expenses 13 percent — including 230 positions. The new Tribune Publishing can continue to cut — but a further 13 percent would simply continue the hollowing-out process of the company and its newsrooms. Importantly, Tribune’s newspapers aren’t steady state: Revenues continue to fall.
Now the new debt service. Let’s say that Tribune Publishing will need to borrow $650 million overall, with half of that borrowing going immediately to Tribune Company as that “special dividend.” What might it pay for that money? Lee Enterprises, considered a large well-managed newspaper company, recently refinanced its own debt at 12 percent. (That was actually lowered from 15 percent.) Tribune may have access to cheaper money; let’s say it wrangles a 10 percent rate for the new, market-challenged newspaper company. That’s a payment of $65 million a year — or a full third of those 2013 profits. That’s more weight on Tribune newspapers back.
Now let’s consider individual backs and calculate that number in terms of jobs. At an average of, say, $75,000 a year, that’s 866 jobs. That’s out of total of more than 8,000 full-time publishing division jobs. The arithmetic is fairly straightforward. The obligatory debt service could be paid for by having 900 or so fewer employees. Let’s say it can limit its new initial debt to $500 million. That would still mean more than 650 jobs.
In striving to make the point that it is trying to preserve journalist jobs, the company has pointed out that many of its cuts were in marketing and technology. That may be good for the journalists who would otherwise have been pink-slipped — but those are also two areas where news organizations of the future need more smart investment, not less. In addition, journalist jobs continue to be cut back, even if they are a smaller proportion of the total cuts.
Now let’s look at Time Inc.’s numbers. Time Warner just announced its full-year earnings. To get an apples-to-apples comparison, we take out the new revenues driven by its fall acquisition of American Express Publishing. For the year, revenue was down about 5 percent, and 8 percent for Q4. Both ad and circulation revenues are tumbling. Time Inc., under new CEO Joe Ripp, has also been cutting in anticipation of going solo. Recently, layoffs of 500 employees, or 6 percent of Time Inc.’s staff, were announced.
Ripp has also greatly reorganized the leadership team, putting some impressive new talent in place in key exec and product roles. Just today, we see the poaching of Scott Havens, a highly regarded architect of The Atlantic’s renaissance, who becomes senior vice president for digital.
What effect might that $1.3 billion in debt have on the ability of that new team to transform Time Inc. into a growth company? Time Warner may well get a better interest rate for its orphan than Tribune, according to knowledgeable observers. Let’s peg it at 7.5 percent. That would create an annual debt service of $97.5 million. That’s the equivalent of 1,300 jobs — or another 12 percent or so — of Time Inc.’s workforce, if and as revenues continue to decline.
There are lots of moving numbers here, but the point is clear: As standalone companies with ever-falling revenue, each will have a more direct responsibility for paying off debt, and the likeliest place to pay for it may well be more aggressive staff cuts.
Both Time Warner and the Tribune Company have legal obligations is to maximize shareholder benefit; as recently as this week, a hedge fund began pushing Tribune CEO Peter Ligouri to sell any Tribune asset he can. In these splits, though, we have current shareholders who will have their shares divided. Presumably, from a shareholder point of view, both TW and TRB would want to maximize the chances of both new companies prospering and rewarding shareholders. Is the burden being placed on the spun newspaper assets prudent, given their marketplace and transformation challenges?
For the current Tribune Company and board, the newspapers appear to be a soon-top-be-dispatched afterthought — one they don’t want to shine much of a light on. Just on Monday, at the J.P. Morgan Global High Yield and Leveraged Finance Conference in Miami, Tribune made its presentation. Given that the company is going mainly TV, most of the PowerPoint’s 25 slides were devoted to broadcast, with real estate, digital properties, and syndication businesses highlighted as well.
In the three slides it devoted to publishing, it highlighted but three fairly broad numbers, with two speaking to a 20th-century audience — and none speaking of dollars and cents.
The new Tribune is ready to be done with the old Tribune, just as Time Warner can hardly wait to jettison Time Inc. — showing its Q4 and full-year financials both with and without the publishing assets. The divorces are about to be decreed, and terms of disendearment betray a lost love.
