By: Mark Fitzgerald
When Morningstar assigned a fair value estimate of zero to shares of The McClatchy Co., the sentence that seemed most striking wasn’t the most sensational assertion, the one that said McClatchy stock “could be worthless.” No, the sentence that really spoke volumes about the dilemma nearly all publicly traded newspaper companies face in this crazy market was this:
“We think the combination of McClatchy’s exposure to the decline in print ad revenue, high fixed costs, and substantial debt burden, is such that the firm will eventually have to be managed to satisfy its obligations to its creditors at the expense of its equity shareholders,” wrote Morningstar stock analyst Tom Corbett.
It was so striking because it contrasted with the report that came out a few months before from another Chicago-based analyst — but one with a debt rating agency, Fitch.
“Although management has stated its good relationships with its banks, Fitch remains cautious regarding companies that may need to renegotiate with lenders in this environment,” debt analyst Mike Simonton wrote in late summer. In other words, Fitch feared that McClatchy, for all its efforts to wring out expenses and pay down debt as quickly as possible, may be still be managing to satisfy its shareholders.
As another ugly earnings-report season comes to an end, newspapers find themselves in a situation where they can please neither the dwindling corps of stock analysts still bothering with newspapers — nor the active group of debt analysts who seemed to follow each newspaper company earnings conference call by downgrading its credit rating.
Newspapers with a few notable exceptions — such as The New York Times Co. and Gannett Co. — have eliminated the dividend that once supported their high stock prices to devote to paying down debt. While that’s never an easy decision for a public company, the fact is newspapers were not being rewarded for it by Wall Street.
The prime example, of course, is GateHouse Media, whose stock turned down sharply even as it paid out dividend much higher than its peers. GateHouse now trades for pennies a share in the Over The Counter market, and the dividend has gone away, too.
Cutting, even eliminating, the dividend is nice, the credit markets are telling newspapers — but not enough to avoid the lower credit ratings that make borrowing more expensive, and, when the bonds get slashed to junk status, place them off-limits to certain banks and other institutions.
After McClatchy announced in October that it was cutting its dividend in half, for instance, Fitch ratcheted down the company’s Issuer Default Rating a notch to B- from B+, a rating suggesting its debt is “highly speculative.” Fitch downgraded its senior unsecured notes to a level suggesting “default is a real possibility,” and that lenders could figure to recover less than 10% of their funds in a default.
And the stock market? It promptly began a sell-off that by late November has McClatchy shares selling near or at all-time lows session after session.
“Ya gotta serve somebody,” Bob Dylan sang once upon a time. But newspapers find themselves with two masters — each of whom thinks newspapers will not serve him faithfully.