The Star Tribune’s rosy post-bankruptcy scenario

On Thursday, U.S. Bankruptcy Judge Robert Drain approved the Strib’s financial plan, officially shrinking its debt from $480 million to $100 million. That staggering drop frees up $25 million a year in debt payments for a business whose revenues will be just under $200 million this year.

In financial projections filed with the court, the Strib forecasts revenues stabilizing and even growing by 2011. While there’s nothing specific about staffing levels in the 270-person newsroom or elsewhere, compensation costs are projected to rise 5 percent per year. At the very least, that mean layoffs would abate, and that state’s largest news source likely remain that way.

But remember: Undue optimism got us into this mess.

The soon-to-be-former owners, Avista Capital Partners, made their 2007 purchase at half the price McClatchy Co. paid nine years earlier. It seemed like a bargain at the time, but all that borrowing left the Strib acutely vulnerable to any downturn. And Great Recession was a doozy, magnifying an already-persistent decline in print advertising.

Debt payments sucked cash away from journalism until the payments couldn’t be paid anymore, costing dozens of journalists, office staff and production workers their jobs. Adding insult to injury, going Chapter 11 has cost the Strib at least $10 million in legal and consulting fees.

By giving his approval, Judge Drain said that the Strib can feasibly meet its obligations. But, once the labor unions swallowed concessions that Drain helped force, no one in the process questioned the numbers. The debtors and secured creditors — who become the owners later this month — worked hand-in-glove, and their affadavits fill the court record.

But is it possible that even with one-fifth the debt, the Strib carries too big a mortgage, and too small a cushion? That instead of a golden opportunity to do restructuring right, they’ve only postponed a cash-sucking, journalism-crippling future?

Cash in, cash out
In trying to gauge the Strib’s finances, there are two main components to analyze: the Strib’s business operations, and its debt structure. This part will look at operations, setting up the debt question in Part II, which will be up on this site Monday.

Before we begin, know that the three-year projection is not a guarantee. The Strib hasn’t even hired its new publisher/CEO — the person expected to unearth new revenues and hidden efficiencies. But the projection is ownership’s best guess, and underpins the newly cemented debt structure.

I asked two industry analysts to review revenue and expense assumptions: John Morton, head of a Maryland-based media consulting firm Morton Research and Ken Doctor, a former PiPress managing editor who covers legacy and new media for the firm Outsell.

The first thing to know is that ad dollars make up three-quarters of the Strib’s income each year. Here’s how the paper forecasts its ad-sales future:

2010: down 3.7 percent
2011: up 7 percent
2012: up 5 percent  

When I first saw these figures last month, I was astounded. To see why, here’s how Strib’s ad revenues have tracked the past three years:

2007: down 15 percent
2008: down 21 percent
2009: down 27 percent

Here’s a visual:

Financial guys call a revenue drop like the Strib’s “a falling knife.” Stopping it is like trying to catch a falling knife, with all the risk that implies.

So I was surprised when both industry guys found the balmy projections reasonable — even, in Doctor’s words, “a bit pessimistic.”

Explains Morton, “Remember, 2010’s ad revenue will be measured against this year’s, which is down 30 percent or more at big papers. The fact is, there isn’t a lot more advertising that can disappear, so I don’t think projecting a 3 percent to 4 percent drop next year from this year’s bleak levels is unduly optimistic.”

The dissenter
But there is someone who disagrees — loudly.

He’s a notebook-filling p.r. man named Brian Tierney — who just happens to publish the Philadelphia Inquirer and Daily News.

Tierney is, to put it mildly, at war with some of the Strib’s biggest creditors, who also happen to hold the notes on the bankrupt Philadelphia papers. Unlike the Minnesota Nice relationship between Avista and its creditors, Tierney wants his lenders to take $35 million in cash and the title to some real estate and go away.

Should that happen, the Inquirer and Daily News would emerge from bankruptcy with zero debt, not the $100 million the Strib will carry, or the $85 million creditors want to hang on Tierney’s operation.

Instead of racking up millions in annual interest costs, the paper could spend that cash on journalism, or sock it away for the inevitable rainy day. Tierney argues that’s the right way to position a community asset for success.

Before you swoon, know Tierney has several holes in his shining armor — including a $350,000 pre-bankruptcy bonus payment he paid himself after getting newsroom workers to delay a pay raise. Still, his “Keep it Local” campaign has blared from his newspapers’ pages and won support of the operation’s blue-collar unions.

Ultimately, such an effort may not impress a bankruptcy judge (though Tierney chose a hometown court; the Strib went to the Manhattan home of its creditors). Still, it’s in Tierney’s interest to trash the financial strategies of his rivals — including New York-based distressed debt investors Angelo Gordon & Co., which has taken the lead in the Strib’s reorganization.

(Bradley Pattelli, an Angelo Gordon portfolio manager and spokesman for the creditors, did not return a call or email for comment. Through a spokesman, the Star Tribune also refused comment for this story.)

Mark Simonton, a credit analyst at Fitch Ratings, agrees with Tierney. In July, he expressed “serious reservations” about the news industry, saying the because of persistent declines in print advertising and a consumer recovery that won’t kick in until late 2010, newspapers should have “little or no debt.”

Ad nauseum
Tierney says rather than a 3.7 percent ad decline in 2010 ad decline, he’s budgeting for a 10 percent drop, adding, “other publishers are telling me the same thing.”

If Tierney is right, the Strib’s ad sales would fall by an additional $9 million. There’s not that big a safety margin built into the plan. Morton notes that a business must generate enough cash from operations to cover debt payments. According to the Strib’s projections, 2010’s operating cash flow is $12 million, with interest payments $9.3 million. That relatively skinny difference — $2.7 million — would be overwhelmed by a $9 million drop.

Doctor, also observes that despite the reorganization, the Strib projects a bottom-line loss in each of the next three years: $1 million to $2 million annually. “We’d expect that they’d project at least a 3-5 percent profit, and would cut expenses to make that happen,” he says.

Add it up, and that’s lots of pressure to cut costs … right out of bankruptcy court. And remember, three-quarters of operating expense is labor: the journalists, pressmen, drivers and office workers who put the paper out.

Doctor praises the Strib’s other cost assumptions, including for newsprint, which he says is reasonable and perhaps even a bit high. So there might be some savings to fill the ad gap, but likely not enough.

Ownership could also dip into its cash stash — a projected $26.8 million by year’s end. But cash is a risky business’s ultimate safety net, and finance types without industry loyalty probably won’t spend down their liquidity.

Of course, unlikely things could happen. The Strib sales staff, which has produced mediocre results compared to the industry, could become stars. A new leader could spearhead new products or practices. Reluctant owners could walk the patience talk.

As pleasant as that sounds, the alternative is as scary. “Chapter 22s or Chapter 33s,” says University of Minnesota Finance Prof. Andrew Winton — businesses that go through Chapter 11 bankruptcy repeatedly.

Doctor doesn’t use the b-word, but says, “From the numbers, it’s hard to generate much optimism here. Seems like they’re planning on operating the business in traditional ways, and not expecting much different results. Flat budgeting — but it’s not a flat world out there; it’s one with galloping change in reader and advertiser preference and choice.”

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Comments (5)

  1. Submitted by Mordecai Specktor on 09/18/2009 - 11:28 am.

    Bloomberg News reports: “U.S. Bankruptcy Judge Robert Drain said in Manhattan court Thursday that the Chapter 11 plan is confirmed, noting that it was an ‘enormous de-leveraging’ for the newspaper. Under the plan, first-lien lenders, an unknown group represented by agent Credit Suisse’s Cayman Islands branch, will control 95.5 percent of stock in the new company.”

    This seems sort of opaque — an “unknown group” in the Caymans.

  2. Submitted by Jeremy Powers on 09/18/2009 - 01:26 pm.

    Unabashedly for-profit corporations have been taking over the media for half a century, but I can’t help but think this may be a new all-time low. With more than 95 percent of the corporation owned by foreign interests in the western hemisphere’s biggest tax haven, it might as well be owned by communists, or worse yet, Rupert Murdock.

    I have virtually no trust in the Star Tribune. As an example, on the day the front page story announces the newspaper is coming out of bankruptcy, the “letter of the day” by regular Republican whiner and Edina cake-eater Bob Huge makes some bizarre comparison between Obama – the nation’s first black president – and Pat Boone – the whitest man who ever lived. How it was published in the first place is astounding. And why it was letter of the day is beyond explanation.

  3. Submitted by janet clearson on 09/18/2009 - 09:18 pm.

    I have been a regular reader of the Strib for the last seven years. I am happy they are finally getting out of Chapter 11.

    I am not sure why you feel it is necessary to present such a ‘doom and gloom’ scenerio. You have no idea what is going to happen over the next three years. Picking and choosing opinions as to what might happen is a waste of time. It is the same as predicting who the Republicans will nominate in 2012.

    How is your site doing? I heard you were stuggling a bit too. I think both you and the Strib need to look up the FREMIUM concept. It looks promising!

    Good luck

  4. Submitted by Bruce Baird on 09/19/2009 - 07:36 am.

    David Brauer has consistently provided the most lively and penetrating analysis of the drama at the Strib over the past few years. Nobody else anywhere in the country comes close.

    Thank you.

  5. Submitted by Bruce Adomeit on 09/19/2009 - 01:08 pm.

    David,
    “Janet Clearson” is entitled to her opinion that quoting John Morton and Ken Doctor is “picking and choosing opinions” and is “a waste of time.” However, anyone who has paid attention to the newspaper industry over the past several decades knows that Morton and Doctor are respected analysts who have the background and the track records to speak authoritatively.
    “Janet Clearson,” who doesn’t exist, also asks how MnPost.com is doing. Well, here’s one of the worst failings of the site: It allows people to register under fake names and send in anonymous comments that look like they came from real people.

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