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Sun papers’ financial troubles deepen

Last month, I wrote about the financial travails of Dallas-based American Community Newspapers, which publishes 44 Minnesota community papers, most under the “Sun” banner. In just a year, the company’s stock had fallen from $5.63 a share to 16 cents, and company officials acknowledged its Minnesota papers were the biggest losers, compared with clusters in Texas, Ohio, and suburban Washington, D.C.

In a Securities and Exchange filing today, ACN acknowledged things are getting worse. Among other revelations:

•  The highly leveraged company (as of last month, $136 million in debt remained on a $165 million 2007 purchase) has now violated credit agreements. “ACN is exploring [restructuring] alternatives,” a company release notes, “but there can be no assurance that ACN will be able to obtain waivers or other relief.”

•  Owners have written off nearly $70 million in “goodwill” — shareholders’ equity from a company worth $165 million 13 months ago. That might not be the end of it: ACN’s release discloses a “reasonable possibility” of a bigger write-down, depending on lender negotiations ad local ad climates. With the company’s market value a mere $2 million, it’s easy to forecast a bigger “impairment.”

• ACN’s revenue slide is accelerating; spring-quarter sales were down 14.4 percent from a year ago. The company says Minnesota’s decline is worse, but does not break out a figure.

What's next?
So what will happen to a community news source serving 457,000 readers in many metro suburbs and cities such as Champlin, Delano and Monticello?

Obviously, ACN doesn’t want to sell or close papers, but those are obvious options if lenders prove insufficiently flexible (and prospective buyers can navigate a credit crunch).

The papers have never been lavishly staffed — there was some shrinkage earlier this year — but more cuts would surprise no one. Last month, ACN's local publisher, Bob Cole, said he was on budget and planned to add two online positions. Online revenues grew 17.2 percent from a year ago, but still only constitute about 3 percent of total revenues.

Company officials were not immediately available to discuss the options, but I’ll update this item if they call back.

The release does claim second-quarter numbers might look worse because ACN outperformed the newspaper industry in the 2007 comparison period. Still, the credit default and asset write-down are undeniable.

Troubling loan figures
If you’re into journalism financials, ACN’s new "8K" SEC filing contains revealing nuggets.

Media companies that borrowed big betting on endless growth now increasingly default on their credit deals. When sales and profits fall, what often trips them up is the mandated “debt leverage ratio” – the amount owed, compared with earnings (before interest, taxes, depreciation and amortization).

Lenders stipulate if the ratio rises too high — in other words, profits don't keep up with debt levels — they can foreclose.

ACN’s debt leverage on its main $108.5 million credit line was supposed to be below 6.5 to 1 — in other words, debt couldn’t be more than six and a half times annual earnings. As of June 29, the ratio was 7.33 to 1 — too much debt, compared with falling profits.

On a $143 million subordinate credit line (whose creditors are paid after the main line) has an 8:1 debt ratio limit, but instead stands at 9.68:1.

So barring very understanding lenders, ACN will need to generate some big operating profits to get right with its borrowing, and that seems fantastical at the moment. (Second-quarter net income was a mere $200,000.)

Short of foreclosure, ACN’s lenders can raise their interest rate 2 percentage points, the company’s SEC filing acknowledges. Not a great spot for investors or employees to be in.

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Comments (6)

Jane makes some great points. The other reason NP's are on the decline is pretty simple - NP readership is generational. For the past 10 years, the average Star Tribune reader has been 44 years old. As the baby boomers get older, there is no one to step in and take their place. Finding a 20-something that subscribes to a NP is difficult, as online and mobile media has replaced flipping the pages of a real NP at the breakfast table every morning. Until NP's find a way to attract younger readers - and keep their attention - the subscriber numbers (which directly affect advertising revenue) will continue to slide (as will profit margins) until the only answer is to shut down and liquidate. It's unfortunate, the NP used to be a crucial communication component of every community, but that's simply no longer the case. Due to the immediacy of the internet, by the time a NP hits hits your doorstep each morning it's content is already irrelevant.

Two words: "Withering Glance"

I agree, bd.

The same economic forces that have wreaked havoc in the housing market are going to consume businesses that are neck-deep in debt like this. Until that shakeout is complete, things are not going to get better--they are going to get worse.

If I worked for a company whose stock price had plunged from $5.63 to $0.16 in a year, I would be seeking exciting opportunities elsewhere. And fast.

So why is this region so unhospitable to newspapers these days. As Brauer has detailed, both the the Strib and the Pioneer Press are on the ropes, and now we see the community papers as well. Yet the retail is still percolating and not yet openly registering the recession I believe is already here. Is there a midwest culture shift away from newspapers and are people in this region not reading newspapers like people in New York are doing? What is wrong with newspapers?

It's not just this region that is inhospitable to newspapers. What's happening to papers here is happening all over the country and community papers are facing the same issues. A few quick thoughts:
1) Retail may be percolating but at the urban neighborhood and suburban community level one trend we've seen is when we have lost longtime pop and mom advertisers in competition with retail chains. The chains don't advertise with us like the mom and pop businesses did. I could drive you through North End and Frogtown and show you the stores that suffered or failed when companies like Wal-Mart, Auto Zone, etc. came in.
2) The loss of employment and real estate ads to online services is a growing factor for our papers.
3) We have HALF as many urban neighborhood papers in the Twin Cities as we had 10 years ago due to the aforementioned factors and, in the case of nonprofits, the loss of many of the grants we relied on for operating and special projects. In St. Paul, when the city began aggressively going after grants for big splashy projects the small papers and every other neighborhood-based nonprofit got shut out. It may have been more sexy and fun for the foundations to pump money into fancy parks and the riverfront but I'd argue that communications at the community level, along with a slew of services, got lost in the process. Compounding this is the fact that many of the foundations have now cut back, restructured, refocused grants, etc.
So that is what is wrong with newspapers, at least at the community level. And controlling it, from one who's been there, is a lot like herding cats.

Young people not reading papers is hardly a new story. It is only when people buy houses and start families that they become interested in property taxes, schools and neighborhood crime, etc. THe community papers also had an edge over the metro dailies because they printed local, local news that wasn't stale by the time it hit the doorstep. Jane's argument about the impact of national chains that don't advertise driving out mom and pop stores would seem to have a greater impact on community papers. So if the papers cannot get younger readers, why not concentrate on the readers they have. Middle aged and older still spend money, arguably more on winter vacations and cruises than younger. Looks to me as if we are heading in the direction of having no newspapers at all.