While I was vacationing last week, the Star Tribune released its reorganization plan. (Bastards!)
Most media reports focused appropriately on the emergence date from bankruptcy (as early as Sept. 3) and the unveiling of a new board and publisher (by Aug. 24).
But there’s a real treasure trove at the back of the 218-page filing — financial projections through 2012. And the Strib consultants’ prediction may startle those in the buggy-whip camp: rising revenues … and rising profits!
Before we dive into the numbers, multiple caveats. On some level, Strib management (which initiated the bankruptcy filing) is trying to convince creditors it’s better to keep the paper open than liquidate it. That’s probably not much of a sell job, since the two groups are working closely together, but the bias is toward a rosy scenario.
Then there’s the fundamental uncertainty of the educated guess. While terming the numbers “reasonable” and based on recent numbers, the filing notes:
Projections reflect numerous assumptions, including various assumptions regarding the anticipated future performance of Star Tribune and the newspaper industry, general business and economic conditions and other matters, most of which are beyond the control of the Debtors and their management.
OK, on to the charts:
Let’s begin with the money the paper brings in.
If the forecast is right, our current economic malaise will be known as The Great Correction. The Strib doesn’t forecast revenues returning to 2007 levels ($304 million), but they will hit bottom in 2010 ($184 million) and do a dead-cat bounce to $199 million by 2012.
As you can see, advertising makes up three-quarters of revenue. The Strib forecasts ad sales will bounce back from $136 million next year to $152 million in 2012.
That’s the most astounding number in the document, especially because ad dough has slid from $288 million in 2006 to a projected $141 million this year. Some of that is the lousy economy, but a lot is technological change … which the Strib money guys seem to think will abate.
(Online revenues could grow — though they haven’t since the first quarter of 2008. But those sales equaled just $17.4 million last year, so even a big percentage increase won’t add big dollars.)
How skinny is the error margin? If the ad forecast is off by a mere 15 percent, the Strib’s profits would be wiped out.
And yes, the Strib makes money. Even through the current disaster, the Strib has never lost money on an operating basis — it just didn’t make enough money to service its hefty debt.
This chart contrasts debt service with cash produced (known to financial wonks as EBITDA: earnings before interest, taxes, depreciation and amortization):
The Strib tipped into bankruptcy when 2008 debt payments ($35 million, the red line) topped EBITDA ($31 million, in blue ). That cash suck — and the likelihood it would widen — is management’s reason for going Chapter 11.
As you can see from the chart, the coffers fatten in future years … if the forecast is right.
In 2010, the Strib should generate $21 million in cash. In 2011, the figure rises to $23 million, and in 2012, $25 million.
The resulting profit margins: 15 percent (2010), 16 percent (2011) and 17 percent (2012).
Not the 40 percent margins of years past, but pretty darned good for a dying industry.
The prospective black ink is less than the paper produced last year, but interest payments are also far lower — $9 million to $10 million annually, compared to $35 million. The resulting profit plumps the Strib’s cash cushion from $26.8 million at the end of this year to $49 million in 2012.
Meanwhile, creditors — mostly bottom feeders who picked up discounted Strib debt from the greater fools — will earn a minimum 5 percent interest on the $100 million they’ll be owed post-bankruptcy. And the rate adjusts upward, depending on benchmark interest rates.
By the way, the projections don’t anticipate paying down principal; the $100 million indebtedness rises to $116 million by 2012. But that’s for creditors to renegotiate somewhere down the road.
And what of the workers? The projections show just how fierce cost-cutting has been. An organization which spent $140 million on compensation in 2007 will spend just $87 million next year.
The good news, such as it is? Forecasters see comp costs rising steadily (if slowly) to $94.1 million in 2012. This theoretically means few or no layoffs, though workers are forgiven for being cynical. Still, it’s a lot easier to keep staff when you’re not cutting payroll (assuming you don’t lavish salaries on execs).
Finally, the price of your morning paper is almost certainly going up. Strategists forecast a 1.5 percent to 3 percent reduction in circulation revenue annually through 2012, which reflects “volume declines offset by price increases.”
Though nothing is set in stone, the Strib (and most papers in America) are playing with various price-hike scenarios. The most optimistic show revenue gains from higher prices, because the average consumer pays more and distribution and printing costs fall.
Too optimistic? Like everything else here, we’ll soon see.