OUTLOOK 2001: CONSOLIDATION CONTINUES

By: Lucia Moses

Relaxing Of Cross-Ownership Rules Expected


With advertising spending decelerating and newsprint prices
causing anxiety, one potential upside for newspapers is
continuing consolidation, spurred by the likely relaxing of
cross-ownership rules.

“You’re going to see more of the broadcast/newspaper-type of
scenarios that we’ve seen with the Times Mirror deal,” says Derek
Baine, a newspaper analyst with Carmel, Calif., research firm
Paul Kagan Associates Inc. “One thing newspaper companies know
is, they’re very vulnerable to recessionary periods … and when
you have more media to sell across, I think you can weather the
storm better.”

That storm seems to be headed for the U.S. economy, if it isn’t
already here. After the longest expansion in U.S. history, the
economy tapped the brakes last summer.

Fears of a recession are mounting – and when advertisers cut
back spending in anticipation of slowing consumer spending, the
newspaper industry is one of the first to feel it. Bob Weil, vice
president of operations for the McClatchy Co., based in
Sacramento, Calif., spoke for many of his peers at a recent
analysts’ gathering: “Managing the cost side of our operations
will be critical to our performance in 2001.”

To meet their profit goals this year, CEOs will be tightening
spending and, in some cases, adding new firepower to the
advertising sales side. San Jose, Calif.-based Knight Ridder, the
second-largest U.S. newspaper company, has already warned that it
will cut up to 2% of its work force this year, although the sales
side will be spared.

Now that the Internet hasn’t turned out to be as big a threat to
print as once feared, newspapers’ online units are likely to be
another area targeted for cost cutting as companies scurry to get
their Internet businesses in the black. Some have already trimmed
their Web staffs, and observers believe the ax hasn’t fallen for
the last time.

If newspapers are finding some comfort in knowing that the
printed page still has great value in the electronic age, it’s
tempered by the spectre of increasing production costs. Newsprint
prices may rise this year for the second year in a row. The
outlook improves for the second half of the year, but only
because of easier comparisons with the same period last year,
when ad revenue growth ground to a halt.

Consolidation could be one of the industry’s saviors, as the end
to the cross-ownership ban looks more likely under the Republican
administration. The Tribune Co. of Chicago started the ball
rolling last year, buying the Times Mirror Co. of Los Angeles in
the largest newspaper transaction to date. Others cast off parts
of their businesses that they considered too small to compete.

Daily newspaper transaction levels set a new record last year,
with a whopping $14.25 billion changing hands, according to Santa
Fe, N.M.-based broker Dirks, Van Essen & Murray. That more than
doubled the previous record set in 1997, when $6.23 billion in
dailies were sold.

“You have to get bigger, and you have to have the diversification
that new media allows,” says Charles I. Wrubel, managing director
of AdMedia Partners Inc., a New York-based advisory and
investment banking firm. “You need to control a lot of
geography.”

Brokers say it’s doubtful this year’s transaction level will come
close to last year’s. But merger-and-acquisition activity will
still be strong compared with other previous years – and as
the number of independently owned papers dwindles, most of the
dealing will continue to be between chains, says Philip Murray,
senior vice president of Dirks, Van Essen & Murray. Newspapers,
he says, have entered the era of the “megadeal, something the
industry has not seen a lot of recently.”

And while the slowing economy may temper transaction prices,
buyers are still willing to pay high prices for valuable papers,
says Wrubel, who expects that dailies will continue to fetch
prices in the range of 11 to 14 times cash flow.

The next person to head the Federal Communications Commission
will help determine the changing face of media ownership. Under
the leading contender, Michael Powell, the agency is likely to
favor relaxing the ban that prevents newspapers from buying
broadcast stations in their markets.

Such a shift could drive consolidation in the coming months, as
companies seek to acquire multiple media in many markets that
they can cross-sell to advertisers while achieving cost savings
through scale. Analysts also expect a proposed accounting rule
change to spur acquisitions. A tentative ruling by the Financial
Accounting Standards Board would remove a disincentive that now
penalizes public newspaper companies when they make acquisitions
and may make them more palatable to investors.

Who will buy whom? Companies such as Arlington, Va.-based Gannett
Co. Inc. and Tribune have the cash flow and geographic diversity
that would support a multiple-media acquisition strategy, while
smaller newspaper companies could be prey for bigger fish looking
to strengthen their advertising clout with local media.

In one scenario, analyst Baine of Paul Kagan says the Cincinnati-
based E.W. Scripps Co., with its fast-growing category TV
business led by HGTV, could be an acquisition target for
companies such
as the Walt Disney Co. or Liberty Media Corp. Says Baine, “To be
able to expand the way they want to expand, you really want to be
partnered with someone who has scale.”

Scripps and other public newspaper companies that are family-
controlled deny they’re interested in selling. But, at some
point, families frustrated with their company’s stock price could
decide to take advantage of the high prices paid for properties
and cash out. After the Chandler family shocked the industry by
selling Times Mirror, anything seems possible. “If the market
continues to ignore their intrinsic value, then we think it
really does make sense for a company to look at other means to
increase shareholder value,” says John Miller, portfolio manager
with Chicago-based Ariel Capital Management, which holds stakes
in newspaper companies.

A potential cross-ownership rule change could be a catalyst for
deal-making, but some independently owned papers are looking for
a measure from Washington this year that would help them stave
off consolidation. President Bush, with bipartisan support, is
expected to seek a repeal of the estate tax, which has been a
factor in the sales of some family-owned newspaper companies.
Scaling back the tax, they argue, would help preserve independent
ownership.

Newspapers face a tough advertising climate in 2001, but a
potential change this year in how circulation is counted may help
them draw more advertisers. Last fall, the Audit Bureau of
Circulations gave its preliminary OK to one of the most sweeping
changes in the definition of paid circulation in nearly a
century. The proposal would let papers count as paid both copies
sold for as little as 25% of the regular price and copies
distributed free to hotel guests. In exchange, publishers must
disclose more information to advertisers about discounted copies.
The change is expected to take effect in April and has widespread
support from newspapers and advertisers.

Not everyone is happy with the proposal, however. Some small
newspapers argue that the change would let large papers unleash
predatory pricing against their diminutive neighbors.

Small papers have another bitter pill to swallow this year, the
second postal rate increase in two years. The average cost to
mail a newspaper increased 6.8% for in-county delivery and 9.9%
for out-of-county delivery. The biggest impact will be felt by
small papers, where mailing can be one of the highest expenses.

“Now we’re having almost a two-year rate cycle, and the talk
around Washington is there’ll be another postal office request by
this summer,” laments Senny Boone, vice president for government
relations for the National Newspaper Association (NNA), the trade
organization for community newspapers. “The price is going up,
and the service level is not improving, so we’re really paying
more for less. You’ve got weeklies that are getting delivered …
maybe over a week late.”

The NNA also is studying the impact of state efforts that would
let local governments publish public notices online instead of in
local papers. The organization estimates the loss of public
notices could cost papers anywhere from 2% to 8% in lost
advertising dollars, with the smallest papers hit the hardest.

Labor made the news last year when Seattle newspaper employees
struck the city’s two dailies. This year, one potential hot spot
is The Providence (R.I.) Journal, where contract
talks begun in October 1999 are growing increasingly bitter.

Also tackling new contracts this year will be The Boston
Globe, which has a history of contentious labor relations,
and the Chicago Sun-Times. The Newspaper Guild also
promises to continue its fight to organize online workers at
newspapers and step up pressure on companies to increase
salaries. “Compensation needs to be increased to keep pace with
the competition out there,” Guild President Linda Foley says. “We
have a brain drain going on in our industry. That’s having its
effect on quality.”

If thoughts like that don’t give a publisher a headache,
implementing new workplace-safety rules surely will. The rules
were approved in the last days of the Clinton administration and
criticized by employers as too costly. But eyes will be on
Washington this year to see if Bush, the courts, or Congress
rolls them back. This much is certain: whether or not the new
ergonomics standard holds, “cost cutting” will surely be the
mantra of newspaper executives this year.

A complete list of the newspaper transactions of 2000 is
printed in the Jan. 22 issue of E&P.



Lucia Moses (lmoses@editorandpublisher.com) is an associate editor covering business for E&P.



Copyright 2001, Editor & Publisher.

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