It’s hard to recall a spate of media deconsolidation like the one in recent months, as companies shed their publishing divisions.
Time Warner unloaded its magazine division, Time Inc. Meantime, Tribune spun off its newspapers, as has News Corporation, with EW Scripps, Journal Communications, and now Gannett planning to follow suit soon. The Grahams sold the Washington Post and kept their education and TV businesses. The New York Times Company has done the reverse in recent years, selling About.com and its Red Sox stake to focus on its namesake paper.
There will be no cross-subsidization for these newspapers and magazines, much less synergy. Indeed, some executives couldn’t resist milking their erstwhile cash cows one last time on the way out.
Tribune Media is the worst of the bunch in that respect. It loaded up its struggling newspapers with debt to pay itself a special $325 million dividend, kept their real estate, and then spun them off without their stake in lucrative digital classified businesses. These are moves straight from the private-equity asset-stripping playbook—something akin to kicking grandpa out of the house when he gets sick and then running up his credit cards.
Time Warner sent off Time Inc. with its stable of magazines and an unnecessarily high $1.3 billion in debt, roughly half of which went to a special dividend. Never mind the billions of dollars in cash the magazines had sent to the mothership over the decades.
Gannett’s newspapers will start debt-free, which is the least that company could do after bleeding them dry for decades. But they won’t get the benefit of the digital classified businesses that helped offset the obliteration of a key print revenue source. Those will go into the new broadcast company.
Rupert Murdoch comes off looking like a saint here, of all things. He spun off News Corp.’s publishing arm with no debt and a whopping $2 billion in cash. The new Journal Media Group, formed with Scripps and Journal Communications papers, will have no debt but just $10 million in cash. It’s unclear what cash, if any, Gannett’s papers will get.
In a sense it’s surprising it’s taken this long for newspapers to be tossed overboard. They’ve been irksome to executives who tend to be focused above all else on growing earnings per share and overall revenue. Investors tend to want growth or at least stable, predictable profits—they’re not much interested in declining assets with uncertain futures. Even if papers figure out a digital revenue source that staunches revenue declines, it’s hard to imagine these ever being businesses with serious growth potential. The monopolies are now in Silicon Valley, and journalism doesn’t scale like Facebook.
All of these new companies are still profitable, largely because they’ve cut costs so dramatically. You can’t cut your way to growth, though, and it’s unclear if these companies will have the cash to invest in many new opportunities.
Tribune Publishing, for instance, earned $94 million on $1.8 billion in revenue last year, a profit margin of just 5 percent that nevertheless was its highest in at least four years. The stock market is valuing it at a price-to-earnings ratio of just 6.3 (the market median P/E is above 20), which essentially means investors expect profits to continue to decline, which would be a good bet. Put another way, the price tag of Tribune’s papers is now $533 million. That’s for the Los Angeles Times, Chicago Tribune, Baltimore Sun, Orlando Sentinel, and four other major dailies.
On Wall Street, there’s been a big move away from conglomerates in the last couple of decades, the idea being that there are people who want to invest in Cheez Whiz, for instance, but who don’t want to invest in Chesterfields. Apparently, there’s a hardy band of investors out there who will plunk their money into legacy publishing stocks but who don’t want more stable broadcast assets.
Call them value investors or call them crazy, only time will tell.