Chicago Papers On The Chopping Block, Sun-Times Media Group Tells Analysts

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By: Mark Fitzgerald

As many as 25 Chicago-area community papers and shoppers face elimination if they don’t get their operating margins up within days, Sun-Times Media Group (STMG) executives told analysts Tuesday.

“They have until June to come up with an acceptable margin. Some will be shuttered, or have their frequency changed,” said John Cruickshank, the publisher of STMG’s flagship Chicago Sun-Times and COO of its Sun-Times News Group division.

The threat to the papers came in a presentation of STMG’s strategy to turn around a company besieged by falling advertising market share, eased but continuing tax liabilities, and poor cashflow that leaves it unable to obtain bank loans at reasonable interest. STMG executives spoke as Conrad Black, the chairman when the company was known as Hollinger International Inc., was in his ninth week of trial in Chicago on federal charges of looting the publisher.

In a session that stretched for two hours industry analysts grilled executives about details of their financial situation — and big questions. The biggest came last. Can Chicago sustain two big newspapers, an analyst asked CEO Cyrus Freidheim, the corporate turnaround artist hired last fall.

Freidheim noted that in the city limits of Chicago, the Sun-Times leads the rival Chicago Tribune in circulation, and was a “fundamentally different” paper than the Tribune, which “attempts to be The New York Times of the Midwest.”

“Look, we are not profitable now, you’ve seen the numbers,” he said. “We haven’t grown recently, you’ve seen the numbers. But we believe that much of that has been self-inflicted. … We don’t have a doubt that we can be profitable. We don’t believe we should back away at all”

Earlier this month, STMG reported a first-quarter net loss of $4.8 million, on advertising revenue that dropped 11%.

To turn around the company, STMG executives said they have repositioned the flagship Sun-Times, created an internal wire service to share content, and integrated its online operations with an entertainment offering that challenges the Chicago Tribune’s popular Metromix site, and an auto site that allows access to the entire Chicagoland inventory of cars for sale.

“The key is the generation and distribution through many media of proprietary local and hyper-local news throughout our market 24 hours a day,” Cruickshank said. On the Sun-Times specifically he added: “The strategy is to make the Chicago Tribune look dull and their tabloid Red Eye trivial — and with their help we think we’ve succeeded.”

Nevertheless, the presentation painted a portrait of a company that has a tough road ahead.

“2007 is a turnaround year, and its going to be an ugly year, so we’re not expecting anything” dramatic to change, Freidheim said.

But he added that it expects to reduce circulation declines “to zero” by year’s end, and to qualify for normal bank loan rates by 2008.

STMG executives indicated that shoppers face the most troubled future.

“Shoppers have been our problem, but even the community papers have been suffering — as we indicated they’re down,” Freidheim said. “Across the board, we’ve seen revenue declines and that has to change.”

Cruickshank said that a number of weekly papers had already been consolidated.

And the company’s production chief, Rick Surkamer, noted that STMG has shut down production plants in Gary, Indiana, and at its Daily Southtown newspaper, reducing the number of plants from five to three.

The Southtown is next in line for the relaunching, and marketing campaign the Sun-Times has undergone. STMG said it has spent about $1 million marketing the paper.

Under questioning by analysts, Freidheim said the company would not offer guidance for future earnings or cashflow, a position he said proved wise in the turnaround of Chiquita Brands when he was brought in as CEO.

But he said that STMG intends to get year-over-year cashflow positive. “What we need to do in order to get credit-worthy is have a good EBITDA,” he added, referring to earnings before interest, taxes, deductions, and amortization. “And right now we don’t.”

“Our situation is tough,” Freidheim said, “but not impossible.”

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