After Howard, Lee May Cast Wider Net

By: Lucia Moses

It’s a challenge faced by many smaller companies in a consolidating world: either grow or run the risk of becoming vulnerable to a takeover.

Lee Enterprises Inc. is no exception. After Lee jettisoned its TV group in October 2000 to focus on newspapers and the Internet, its investors grew frustrated as the $560 million in proceeds from the TV sale sat idle, waiting to be put into play.

Lee’s announcement last week that it had agreed to buy Howard Publications — the first sizable newspaper industry deal since 2000 — seems to have quelled those concerns for now. And Lee may not be done.

The company has room to buy more dailies in the 30,000-to-125,000-circulation range. Mary E. Junck, Lee chairman, CEO, and president, told E&P that the company maintains a “strong interest” in buying out the Capital Times Co., its co-owner of the Wisconsin State Journal and The Capital Times in Madison, plus three other Wisconsin dailies.

Some suggest that Hollinger International Inc. might sell the Post-Tribune in Gary, Ind., which could present Lee with a chance to add another Chicago-area paper to The Times, Howard’s paper in Munster, Ind. Others speculate that Lee could sell or trade the outlying Howard papers, such as The Times and Democrat in Orangeburg, S.C., though Junck maintains Lee has no plans to do so. One of the great things about the deal, she said, is “it gives us the opportunity to expand in different parts of the country than [the ones] we’re currently in.”

The planned $694-million cash deal for Howard would give Lee 16 more dailies for a total of 38, plus a joint interest in six others; grow its revenue by 47%; and lift its overall daily circulation above the crucial 1-million-copy mark, which could enhance Lee’s clout with advertisers. The deal would also give Lee, which is based in Davenport, Iowa, and now has papers concentrated in the Midwest and Northwest, a presence in California, the Northeast, and Southeast. Linda Lindus, publisher of the Southern Illinoisan in Carbondale, and Michael Gulledge, publisher of the Billings (Mont.) Gazette, will assume group publisher titles — other Lee executives also will add responsibilities.

Owning papers in small to midsize markets, which are somewhat insulated from swings in the economy, seems smart in these times. For the quarter ended Dec. 31, Lee’s revenue dipped only 6%, while many of its peers reported double-digit declines.

Howard’s biggest paper is the North County Times in Escondido, Calif., though it’s probably best known for Munster, which company President William E. Howard transformed into a model of newspaper technology.

For its part, Howard had its own pressures that led up to the deal. Retired President Robert Howard, William’s father, told E&P he started thinking about selling several years ago, primarily to avoid an estate-tax bite. Although the estate tax will be phased out by 2010 under a provision in last year’s federal tax package designed to preserve family-owned businesses, Howard still feared his family would be forced to sell to pay the tax bill upon his death. “The rate decreases are very slight,” he said. “You’re still talking about a very big number.”

The Howards first approached Lee 18 months ago about selling. The family will now turn its attention to its Howard Charitable Foundation and its other, smaller, business, Howard Energy Marketing Inc., a Wauwatusa, Wis.-based retailer of natural gas.

Some would argue the deal has another positive for Lee: Under new accounting rules, acquirers do not have to write down goodwill — the amount paid for the intangible assets of a business — as a noncash charge against reported earnings. Rather, companies only have to write down an acquisition’s value if it loses value.

The change will give Lee’s earnings a big lift starting in its next fiscal year. For the rest of the industry, noncash charges most newspaper companies have taken in the past will fall off their earnings this year.

Conventional wisdom says that eliminating the noncash charges will encourage deal-making because companies will look more attractive on the basis of reported earnings. To most newspaper analysts, though, who care more about cash flow (which excludes goodwill amortization), the change makes no difference.

For its part, Lee said the rule change wasn’t a motivating factor in the deal. Chief Financial Officer Carl Schmidt said, “I think the financial community, and analysts, for a while have looked at cash flow in the important indicator.”

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