In a memo this afternoon, Star Tribune publisher Chris Harte is giving his paper’s unions six weeks to ratify $20 million in cuts, on top of $10 million from non-union expenses.
“The survival of the company is at stake,” he writes.
For months, Harte has been trying to wring $12.5 million in annual cuts from the Strib’s blue-collar unions; two unions said yes but a third has blocked the givebacks for all, saying the publisher was overhyping the threat. This summer, the newsroom accepted a $2.5 million hit on what had been a $25 million annual budget.
Harte is not specific about who will take what haircut. Late last month, the paper ended publication of its MARQ specialty magazine, letting go six employees. That’s a pittance compared to what Harte now seeks.
The publisher makes clear that his secured lenders — “who have already lost hundreds of millions of dollars on the value of their loans” — won’t restructure the company’s unpayable $486 million debt unless “immediate action” brings “expenses in line with its greatly reduced revenue.”
Since owner Avista Capital Partners’ equity is long gone, I’ve always questioned what leverage secured lenders really have. They could foreclose, but then they’d own an asset they don’t want to manage — and if they further screw up the asset value, they’ll be in an even bigger hole.
For PR reasons, Harte refers to a potential “court-supervised reorganization.” The rest of us call that “bankruptcy.”
However, Chapter 11 financing has evaporated in the credit crunch, which leaves Chapter 7 liquidation. That would be a disaster for workers, but selling off assets in a crappy economy wouldn’t help investors’ bottom lines, either.
Given the industry’s 18 percent third-quarter revenue drop, the Strib is almost certainly operating at a loss. (Operating profits exclude debt payments, but the paper stopped paying those bills this summer.) Obviously, no one will lend the Strib money now, so it simply has to cut expenses to meet current or projected revenues.
I’ll round up the usual suspects and try to get more in a bit. For now, here’s Harte’s memo:
Over the past few months I have been keeping you updated on our financial condition and what we need to do to keep our company viable.
Unfortunately, two factors now make it very clear that 2009 will be even worse than 2008. First, we had hoped that the steep decline in ad revenue would bottom out and that the decline would get smaller late this year. That did not occur. Second, the country is now in the worst financial slump since the Great Depression, and several major groups of advertisers (including auto makers, home builders, real estate agents, retailers and financial institutions) are in their worst condition in decades.
In our business, when revenues decline, most of our expenses stay flat or increase unless we take concerted action. So to remain viable in this current economic crisis, we must further reduce costs significantly.
As you well know, we have been aggressively cutting expenses for almost two years now in response to declining revenue. Even with only modest cooperation from some unions, we were able to implement a number of cost-savings initiatives, and we very much appreciate the sacrifices many of you have made. But what we have accomplished is not nearly enough, and we must quickly achieve millions of dollars of additional expense reductions across the entire organization.
We invited the leadership of all our unions to meet today with us and our advisors. As you know, we have a predominately unionized workforce and have been trying since March to get union consent to necessary cost reductions. Despite some progress over the summer and the efforts of some unions to work with us, we were ultimately unsuccessful, and have been able to achieve only a small fraction of the cost reductions we need from our unions.
Our message in the meetings today was that the need for real expense reductions has now become more imperative than ever. And prompt union cooperation is essential. We must work together urgently to achieve immediate and substantial reductions in annual expenses and implement necessary changes to our collective bargaining agreements.
Our message to the union leadership is that we must reach agreement quickly on contractual cost savings totaling approximately $20 million, and that we must get these reductions ratified by the unions’ rank-and-file members by mid-January. The survival of the company is at stake.
In addition to cost savings we are seeking from our unions, we are already beginning to implement an additional $10 million in savings, which is incremental to the more than $50 million in reductions we have made over the past two years.
At the same time, we are in negotiations with our lenders to restructure our balance sheet and reduce our debt significantly enough to allow us to survive. But our secured lenders— who have already lost hundreds of millions of dollars on the value of their loans— have made it very clear that the company must take immediate action to bring its expenses in line with its greatly reduced revenue before they will agree to restructure the company’s debt.
We very much hope to reach a consensual solution that will allow our company to adjust our labor expenses to affordable market rates and avoid an expensive and difficult court-supervised reorganization. Without the support of our unions, an out-of-court solution is not possible.
We value all that you do for this great organization, and we certainly would not be asking for more sacrifice if it weren’t absolutely necessary. But it is.
I wish I didn’t have to bring you this news now, but our situation is very serious, and I want you to have as much background as possible on what is happening. While we recognize that these events are potentially distracting, the best thing we can do is to stay focused on our responsibilities and continue putting out great products day in and day out.
In the face of all our financial challenges, we need to remember that we remain the leading news and information provider in the Twin Cities, which is a strong foundation for our future success. Our Internet audience is growing steadily, and we have by far the largest local market reach — both print and digital. We are growing our ad revenue in the two areas most critical to our future, direct sales of digital ads and zoned sales to small and medium size advertisers. Our mobile and video offerings are rapidly growing and improving. And we have managed to cut costs in ways that still allow us to produce a first-class daily newspaper that continues to attract over a million readers every week. If we can continue to reduce costs, build our new businesses, and maintain the strength of the daily paper, when the economy recovers, we will recover with it as a much stronger, leaner and more modern company.
I will update you again when we have more to report.
In the meantime, thank you for your hard work.