Nieman Foundation at Harvard
Today’s a rough day to root for American newspapers. In particular, for the country’s No. 1 and No. 3 newspaper chains.
(The No. 2 chain, McClatchy, declared bankruptcy two weeks ago today. No. 4, MNG Enterprises, is owned by Alden Global Capital, which is roughly two Infinity Stones short of killing off half of American journalism. And how are things with you?)
Let’s start with what is now far and away the largest chain, owning about a quarter of all daily newspapers: Gannett. It’s the result of The Company Formerly Known As Gannett being bought by and merged with GateHouse Media, also known as New Media Investment Group, in November. (For clarity, we’ll refer to TCFKAG as Old Gannett and the current merged company as New Gannett.)
This morning brought the first quarterly earnings report from New Gannett post-merger. Would New Gannett, like the Avengers, be stronger together than apart? Some, er, highlights:
Same-store revenues are down about 10 percent. By same-store revenues, we mean comparing Old Gannett papers and GateHouse papers to themselves a year earlier. The Old Gannett side was down 10.1 percent; the GateHouse side was down 9.6 percent. Those are both worse than the FY2019 same-store numbers — meaning the rate of decline got worse over the course of the year.
On Gannett’s earnings call this morning, CEO Mike Reed said the decline “was attributable in part to the employee distraction caused by the acquisition and the announcement of our synergy target.” Shiny things everywhere, I guess.
The declines are broad. That is, it wasn’t just circulation or advertising — it’s both. Print advertising: down 20.1 percent for Old Gannett, 16.3 percent for GateHouse. Circulation revenue: down 10.3 percent for Old Gannett, 7.2 percent for GateHouse. Digital advertising/marketing services: down 1.6 percent for Old Gannett, 0.4 percent for GateHouse.
If you’re looking for bright spots, here’s one important one: digital-only circulation revenue was up 46 percent year-over-year, though off an unimpressive base, and Gannett projects a 35 to 40 percent increase in 2020. Reed said digital circulation produced “nearly $51 million in pro forma revenue” — in a company with $1.9 billion in revenue in 2019. Gannett is also very hopeful about its events and digital marketing businesses — though lots of newspaper companies have been very hopeful about those two before, and the hopes have generally grown smaller over time.
Where’s cash flow coming from? Selling real estate. Reed, in discussing its plans to pay down the company’s debt, said it’s already used $8.9 million in real estate sales for payments, “and we anticipate an additional $100-$125 million in real estate sales by the end of 2021.” In other words, if your Gannett newsroom sits on valuable downtown real estate, you might want to get some boxes ready.
It’s worth noting that “an additional $100-125 million” is slightly higher in what was pitched to investors as a “sell $100 million in real estate assets over 24 months” target last month.
More cuts are coming. Reed says that by the end of Q1 (March 31), Gannett will have made cuts that add up to “over $60 million in annualized savings.” By the end of 2020, the company’s target is to be more than halfway to its $300 million savings goal.
That likely means two things: It’s probably safe to bet on some layoffs between now and the end of March. And whatever cuts have been done by then, they’ll probably represent only about 40 percent of the total cuts you can expect by end of year.
Print’s going nowhere. The Gannett bull narrative is that print advertising — the revenue puzzle piece most obviously and irreversibly collapsing — is going to be an ever-shrinking part of the overall picture. But:
"Print subscribers are highly profitable and would have to decline a lot" for the company to end print operations, Gannett CEO Mike Reed tells investors on an earnings call. "We don’t have any plans in the near future to do anything like that."
— Nathan Bomey (@NathanBomey) February 27, 2020
Gannett’s giving whatever cash it can find in the cushions to investors. The company announced it plans to resume paying a quarterly dividend to shareholders — the price it feels it has to pay to keep investors interested. At a projected $0.19 a share, that’s about $11.4 million for Q1 alone. Stretch that over a year and that’s more than $40 million in earnings — about 30 percent of all projected free cash flow — that’ll be handed out to shareholders rather than invested in the business.
Wall Street isn’t happy. When GateHouse buying Gannett was announced in August, the value of the deal was $1.4 billion. By the time it was finalized, that had shrunk to about $1.1 billion as Wall Street kept selling GateHouse stock.
Today? The market says Gannett is worth only $591 million, having lost more than 20 percent of its market cap since the deal closed three months ago.
To quote a billionaire: “Nobody believes the numbers.” It was back in November that GateHouse investor Leon Cooperman complained on an earnings call that nobody buys the kind of turnaround story the company was selling:
When I listen to you, Mike, on the call, I’m reminded of the deceased comedian, Rodney Dangerfield, who used to complain he gets no respect. And, so I look at page 88 of the S4, the proxy statement that came out and connects with the merger. And if I take the numbers there, the stock is presently trading at 2.7× EBITDA. And this assumption, so nobody believes the numbers, no, on the resized dividend, the stock gives 9%, you’re 2.7× EBITDA. In 2021, you’re going to fix the financing.
Nobody believes it. And I think part of the problem is Gannett’s total revenues have been declining at over 9% over the past few quarters. New Media’s revenues have been declining at around 7%. In fact, I think the Q3 was 7.9%. Post-merger, you’re projecting declines 3.5% in 2020, 1.5% in 2021 and down 0.4% in 2022. As regards margins, they’re running 11% to 12% currently. Post-merger, you’re expecting 15.6%, 18.6%, 21.3%, ’20, ’21, ’22.
Now I can understand the margin expansion stemming from the synergies, but I don’t understand how we go from revenue declines that are 7% or 8% to 3% or 4%. What is behind that and how confident they are that this is going to be the case?
In other words: You project that the rate of decline will slow, quickly, to just 3.5 percent in 2020 and lower after that. And that seems, um, really unlikely given what we know about the newspaper business. That’s a big part of why Wall Street isn’t happy. And given the declines reported today (along with an 11.6 percent margin), the skepticism seems warranted.
Cooperman was back on the earnings call this morning, and he was working in the general your-numbers-seem-nuts-to-me vein:
I just don’t believe where the stock is trading. So I got to ask the question again.
In January or early January this year, you had an interview in Las Vegas [and were asked:] You’ve bought a lot of stock, what are you thinking about valuation? And I think your response was, as you looked out a few years, you see the Company is going to have a valuation somewhere between $4 billion to $5 billion. I see a debt paydown to approximately $1 billion. So I see a market cap of $3 billion to $4 billion, which gives me a $25, $30 stock, which is I guess six times where we are trading currently…
I mean, I’ve never seen such a disconnection from fundamentals…
Reed’s response was to repeat something he’d said earlier in the call — that he doesn’t believe the stock is currently trading on fundamentals (meaning what the company is actually worth).
Our stock price performance, which has certainly been disappointing, should not obscure the fact that the combination of New Media and Legacy Gannett creates a tremendous opportunity to significantly reduce costs, accelerate the path to revenue growth and create significant value for shareholders…
…the stock is not trading on fundamentals today and I think what’s — what’s happening is there is a ton of shorts in the stock and there is a wait and see approach for a couple of quarters to see how Q1 and Q2 actually do. Can we grow EBITDA and can we improve revenue trends? And if we deliver on both of those in Q1 and Q2, I think we’ll start to squeeze the shorts out and I think we will start to trade on fundamentals.
In other words: Wall Street doesn’t believe our numbers. A ton of people are shorting our stock, betting it will fall further. That’s artificially deflating the price. If we do well, the stock could go up more rapidly than the financials as fundamentals move to the fore.
For an idea of the scale, look at how many people are shorting Gannett. As of January 30, a whopping 21.18 percent of all Gannett shares were shorted.
Compare that to the same number for AT&T (1.69 percent), Microsoft (0.75 percent), Facebook (0.94 percent), or ExxonMobil (0.93 percent). Heck, compare it to the same number for other newspaper stocks, like Tribune (1.16 percent), Belo (0.11 percent), or Lee (4.70 percent).
Maybe Mike Reed will be able to pull it off: find the right synergies, invest in new revenue lines, grow the segments that are working, and expose all those short-sellers as fools, and not the motley kind. It’d be good for a whole lot of American cities if it did.
Okay, now let’s talk about Tribune Publishing, owner of the Chicago Tribune, Hartford Courant, Baltimore Sun, New York Daily News, and a handful of other metro newspapers.
It has been a hell of a last month or so for Tribune and its employees. I wrote about it back on February 3, when Alden Global Capital — which now owns about a third of Tribune stock — managed to push out CEO Tim Knight and begin a giant round of cost-cutting.
Some of that has come at the top, management structure-wise. After Knight, a huge swath of executives got the ax. Strange job-shares were born, like the editor-in-chief of the New York Daily News also editing…The Morning Call of Allentown, Pa., in his spare time?
And some of that has come in the lower ranks, including newsrooms, where staffers with at least eight years of service were offered buyouts. That removed, for example, a reported 13 newsroom staffers from the Chicago Tribune.
Today, Tribune stayed in the newsroom, but moved back up the chain of command: ousting the Chicago Tribune’s publisher and editor-in-chief, Bruce Dold. That ends Dold’s 42 years at the company — the sort of career you shouldn’t expect to see many more of.
Back in the good old days, “editor-in-chief” and “publisher” were separate jobs — which makes sense, given the traditional editorial/business wall. But the state of the industry has made it increasingly common for one person to share both duties. Tribune combined the job at all of its newspapers in 2016 — a Michael Ferro idea.
But after nearly four years of doing both jobs, Dold will now do neither. In fact, no one will do either as a full-time position.
The job of Chicago Tribune publisher is…disappearing. The job of Chicago Tribune editor-in-chief is going to Colin McMahon, another Trib vet who until now has been chief content officer for the entire Tribune chain, over all of its newsrooms. But he’ll keep doing that job, too.
(For young readers: Being editor-in-chief of a major metropolitan newspaper has not traditionally been a side gig.)
Honored and grateful for this opportunity. Indebted to @BruceDold @pkendalltribune for all I have learned from them over the years and all they have contributed to Chicago Tribune, to journalism and to the community. https://t.co/sFFHrqermY
— Colin McMahon (@colinjmcmahon) February 27, 2020
Peter Kendall, the paper’s managing editor for content — who “oversees all newsgathering departments in the Midwest’s largest newsroom” — is also out, and that position isn’t being replaced either. (The paper’s managing editor for audience, Chrissy Taylor, is staying.) Kendall did 32 years at the Tribune.
In other words, what just a few years ago were three of the most powerful positions at any major newspaper — publisher, editor-in-chief, and managing editor overseeing the newsroom — are, at the Chicago Tribune, now eliminated, part-time, and eliminated, respectively.
Tribune reports its quarterly earnings next Wednesday, so we should get a better idea of just how much of the company has been edited out.
June 30 may be the critical day. Or maybe the money men will figure out an arrangement before then. Hell, there are two more full days left in February to hurt journalism — it’s a leap year, you know.
