Another JOA Out — Not With A Bang, But A Whimper

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By: Mark Fitzgerald

(Commentary) Getting paid not to publish a newspaper isn’t as lucrative as it used to be. You can see that if you read deep enough into the earnings report for its second fiscal quarter that Lee Enterprises released on Monday. Granted, you’ll have to read pretty far in. If you hit the “safe harbor” boilerplate, you’ve gone too far, but only a little bit.

Lee said it was recording a liability on its balance sheet for the quarter of $55.6 million in goodwill related to a 5% piece of its former joint operating agreement (JOA), and reducing earnings by another approximately $7.5 million, or 17 cents per share for the liability related to the stake held by The Herald Co. Inc.

The WHO company? Thereby hangs a tale.

Lee has been disclosing this liability ever since it bought Pulitzer in 2005, but the story goes back much farther, and says a lot about the false promise of JOAs, and the current weakened state of newspapers valuations.

Just so I don’t bury the lede, here’s what the Lee earnings release says in effect: In 2000, when Pulitzer bought out its JOA partner — the Newhouse family, incorporated for this purpose as the Herald Co. — the companies agreed that Newhouse would get a one-time opportunity on May 1, 2010, to force Pulitzer to buy back its 5% stake. There is, of course, a formula to calculate the value of the stake in 2010.

Bottom line: Back in 2000, Pulitzer was required to maintain a reserve of $150 million to buy that slice of the business. In its earnings release, Lee says it figures the value of the stake as of March 30 was just $70.8 million.

This shrunken sum, then, looks to be the final payoff for a JOA formed in 1959 when Newhouse published the morning daily St. Louis Globe-Democrat and Pulitzer the afternoon St. Louis Post-Dispatch. By 1983, the market-leading P-D wanted desperately to go to morning publication, and the Globe-Democrat agreed to fold in exchange for continuing to share equally in the P-D’s profits and costs.

The JOA, envisioned to last at least 50 years, had 30-year extensions that could have taken it well into this century.

There was one brief complication in this cozy arrangement, when federal antitrust authorities demanded that Newhouse sell the Globe-Democrat to the only person who wanted it, a 31-year-old who fairly quickly ran it into the ground. The paper was very briefly revived under new owners, and folded for good in 1985.

The Newspaper Preservation Act of 1970 had facilitated the transition to a one-newspaper city, just as it would do again in Columbus, Pittsburgh, Miami, Anchorage, Birmingham, and Albuquerque.

For the next decade and a half, Newhouse continued to receive payments like a farmer idling his field in a crop subsidy program.

In 2000, while denying it was shaping itself up for a sale, Pulitzer offered to buy Newhouse out of the JOA. It paid $306 million upfront for 95% of the Newhouse stake, and agreed to make a final payment when the JOA terminated, a date eventually set for 2010.

By that time, Newhouse had collected $177 million for not publishing in St. Louis.

The final payday, though, is not looking quite so sweet, reflecting the fortunes not just of Lee but the newspaper industry in general lately.

In its earnings release this week, Lee reiterated that it intended to take a big non-cash charge for goodwill and masthead impairment, somewhere between $500 million and $700 million, reflecting a stock market valuation that sank 67% in 2007.

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