By: Mark Fitzgerald And Jennifer Saba
No sooner was the Christmas season of goodwill toward men over than the season of news- paper goodwill write-downs started again. As they did about this time last year, chains are taking some hefty goodwill “impairment” charges, or warning that they soon would.
The new year was all of 24 days old when Belo announced it would take a first-quarter, non-cash charge of $370 million related to goodwill impairment at The Providence (R.I.) Journal and at The Press-Enterprise in southern California, a state hit hard by the real estate collapse. McClatchy, with papers in California and Florida, soon followed with a massive $1.4 billion after-tax write-down after executives warned it would be a necessary move. This was in addition to the $1.3 billion charge it took in November 2007.
Goodwill in its simplest form is calculated by subtracting the worth of tangible assets of a business (such as presses or buildings) from the fair market value of the company. Goodwill consists of those intangible assets that would include a newspaper’s brand and perceived strength in its market, something that must be evaluated at least annually to see if it has lost value. If that happens, a company takes an impairment charge to its income.
While the impairment charge is a non-cash charge, it nevertheless lowers earnings on the books. And after decades of enviably high goodwill, newspapers in the last year have been forced to fess up on their books that they’ve lost value in the market.
The New York Times Co. was one of the first publishers to lead the impairment-charge parade in January 2007, when it announced a $735.9 million write-down on its troubled New England properties ? a stunning drop in value, considering the company shelled out $1.3 billion for The Boston Globe and Worcester, Mass., Telegram & Gazette in 1993. In January, the company took another charge of $10.5 million.
Impairment charges were all but inevitable following several years of declining ad revenues, shrinking circulation among big papers, and, especially, a series of would-be blockbuster sales that served only to show that the values of newspapers were faltering.
Tribune Co.’s auction, for example, not only failed to stir much interest from traditional newspaper companies, it ended up changing hands in a going-private deal for $8.2 billion ? just $200 million more than Tribune paid to buy Times-Mirror in 2000.
After bragging it got a bargain when it acquired Knight Ridder for $4 billion, McClatchy did manage to sell for fairly lofty multiples the 12 so-called “orphan” dailies from that deal. But it also shook the industry by unloading the Star Tribune in Minneapolis just 10 months later for the fire-sale price of $530 million. That’s about half the amount it paid for the prestige property in 1998 ? and a multiple, according to some analysts, of just 6.5 times cash flow. With the two back-to-back write-downs, McClatchy has effectively written off half the value of its Knight Ridder purchase.
Add to that Wall Street’s profound disenchantment with the newspaper sector, and the issue of goodwill impairment became impossible to avoid.
By Alan Mutter’s calculations, the market value of publicly traded newspaper publishing companies at the end of 2007 had fallen by $23 billion (or 42%) since 2004, which he characterizes as the last good year for the industry. And most of that damage, the San Francisco-based newspaper and new media consultant says, came in just the past year.
Like other newspaper executives, McClatchy CEO Gary Pruitt plays down the significance of the impairment charge. “It’s important to understand that this non-cash charge does not reflect our view of the long-term health of the newspaper industry or McClatchy,” he said in a statement about the Q4 2007 results. “In fact, if we were able to base the valuation on our discounted cash flow analysis and recent transactions, our current level of goodwill could be sustained. But GAAP requires that we reconcile the value indicated by our publicly traded stock with our stockholders’ equity.”
A.H. Belo Corp. CEO Robert Decherd was equally upbeat despite announcing a $370 million non-cash impairment charge in Q4 of last year.
“Despite challenging industry conditions for all media companies, these required goodwill-impairment charges are not reflective of our positive view of the value of Belo’s underlying businesses,” Decherd said in a statement. “We remain optimistic and encouraged about the future success and value of our businesses ? both as to newspapers and television.”
Michael Peters, an associate professor of accountancy at Villanova University, says it’s in the blood of CEOs to be optimistic. “Does [the write-down] affect current cash flows? No. Does it affect the company’s ability to pay off debts? No. It is a non-cash charge? Yes,” he says.
All true statements, but impairment charges signal something else: “It tells us a company is expecting a lot less in earnings or future cash flows,” Peters adds.
Write-downs usually come hand-in-hand with big acquisitions. When a company acquires an asset, it has to determine what it is paying for; in essence, auditors have to account for everything. Once they identify hard assets and liabilities, any gap between that ? this gap is often hard to gauge ? and the purchase price is, to simplify it, plugged into goodwill.
“It’s really a kind of truth-in-labeling,” explains George Harmon, associate professor at Northwestern Medill School of Journalism who teaches the business of media. “The brand of a newspaper was always a great thing. It had credibility and audience quality and so forth. If you have some deteriorating in the perception of the brand, which in the case of news-papers means your audience is a little weaker and smaller than it had been, then you write it down.”
Auditors are required by GAAP standards to run impairment tests when there are indicators pointing to a decline in the business. On top of that, they are now required to take under consideration the market capitalization of the company.
Therefore, publisher after publisher has been announcing goodwill charges as newspaper stocks swoon. But there’s one notable exception: Lee Enterprises. Even though the Davenport, Iowa-based company swallowed the much larger Pulitzer Co. in a $1.4 billion transaction in 2005, Lee has been silent on the matter.
Lee stock plunged 52.8% for the calendar year 2007, leading many to expect it to take an impairment charge. But instead, in an SEC filing Lee disclosed that it was not taking a charge for 2007, and continued to value its goodwill at approximately $1.5 billion.
Through a spokesman, the company declines to comment beyond what Lee says in the SEC filing: “The company analyzed the recoverability of such [intangible] assets as of Dec. 30, 2007, due primarily to the difference between its stock price and the per-share carrying value of its net assets. The company concluded that the fair value of its business exceeded the carrying value of its net assets as of Dec. 30, 2007.”
Impairment charges by themselves don’t move markets, notes one analyst who asked not to be named because he is transitioning from covering the newspaper sector. “It doesn’t happen in a vacuum,” he says. “A goodwill impairment charge really is a lagging indicator ? it happens after something bad happens.”
Mike Simonton, senior director in the media and entertainment group at Fitch Ratings, is equally blas? about write-downs. “The deteriorating prospects of the industry are already factored into our models and ratings,” he says, adding that generally a non-cash charge doesn’t move the needle. “We don’t wait for the accounting to tell us something was wrong.”