Merrill Lynch Cuts Estimates

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By: Jennifer Saba

Bracing for an economic downturn, Merrill Lynch cut its 2006 newspaper ad revenue growth estimates from up 1.2% to flat and its 2007 forecast from up 1.1% to down 1.5%.

All major categories are expected to take a hit including classified. Help-wanted and real estate results are expected to decline in 2007. Auto advertising is expected to drop too, though not as severely. There is concern over further fallout from the Federated/May merger in the retail category.

The possibility of leveraged buyouts (LBO) is doubtful even though the Street is pounding the sector. More likely, publishers will institute ?large scale repurchases? and big dividends wrote analyst Lauren Rich Fine in a note released today.

While the Tribune Co. is the latest newspaper chain under the thumb of shareholders, Merrill Lynch raises the idea that with its single class of stock and no family control, Gannett could be next company in the spotlight. That could mean financial restructuring however, the research firm bats down that notion: ?We are less convinced as Gannett?s already high margins limit returns to any financial sponsors and management seems more focused on acquisition opportunities.”

Merrill Lynch also models ad revenue growth under a ?recession scenario? something the research firm pegs as a 50% chance. Under such circumstances, newspaper advertising revenue could slip 3% in 2007, resulting in a 15% drop in industry operating incomes.

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