PrintJanuary 26, 2009
The Gray Lady turns a deathly shade of pale
Arthur Ochs "Pinch" Sulzberger Jr. has driven the proudest institution in journalism to the doorstep of ruin, its corporate debt earning the humiliating label of "junk" from Moody's Investors Services. And it wasn't just a slide over the line, the company tumbled three steps below investment grade.
Even worse is Moody's negative expectation, meaning further downgrades are on the horizon in the next 12-18 months. Moody's has withdrawn its rating for NYTCo commercial paper, its unsecured corporate borrowing. Nobody in his right mind is going to loan the company money that way anymore.
The terms of the company's $250 million loan from 2 companies controlled by Carlos Slim Helú, the Mexican billionaire the paper once scorned, force the Times to pay over 14% to borrow money. The added interest cost, especially the 11% that is paid in cash (the other 3% gets added to the debt balance, just like a credit card bill that can't be paid in full), is one factor in Moody's downgrade:
"In Moody's opinion, earnings pressure and higher cash interest costs will limit free cash flow generation in each of the next two years notwithstanding a significant reduction in capital spending, and the recent 74% cut in the dividend."
"Earnings pressure" refers to the accelerating pace of revenue decline, and Pinch's inability to cut costs at anywhere near the same pace as the rate of revenue decline.
Only recently has the company tightened some rather lavish expense account practices:
- News staff can no longer take each other out for drinks and charge it to the company! They had a great deal going there, going out with your colleagues for drinks and maybe dinner.
- New per meal expense limits: $50 for dinner, $30 for lunch, $15 for breakfast. The high end places are now out of bounds. Apparently earlier, they weren't.
- And even after the memo announcing expense account cuts was issued, Maureen Dowd wrote a story about "spa guilt" among the rich, deducting the expenses she incurred at a luxury spa.
Shareholders have lost between 80 and 90 percent of their investment in the company's common stock over the last 5 years, while the Times journos have merrily enjoyed the elitist lifestyle bubble on the company dime in Manhattan and capitals around the world.
Survival
There is reason for the heirs to the Sulzberger/Ochs fortune to be concerned for the survival of the business as an independent ongoing entity under family control. I have been warning for years that Pinch's stewardship was on the road to destroying the family fortune, defaulting on the "trust" they so proudly embraced -- keeping the Times an independent voice committed to excellence.
Few New York families could rival their patrician status. Materially comfortable in an expensive city and able to move with ease at the highest levels, custodians of the mightiest of public voices, members of the family were pillars of the power elite in New York. Now, they must contemplate financial ruin, or at least handing the company over to their social and moral inferiors, salvaging at best a tiny portion of the vast fortune that once supported them handsomely.
Moody's is clearly worried about the company's liquidity, giving it a Speculative Grade Liquidity rating SGL-3. The company faces some substantial debts coming due through 2011. Moody's believes the Slim Money and other sources of cash will cover the 2009 debts, and the majority of a $250 million note coming due in March, 2010. But it has a $400 million debt rollover coming due in June, 2011. To pay that note off, the company will have to scrape together whatever cash it can drag out of its operations, and add money the company hopes to generate by selling (and leasing back) its interest in its headquarters building, and selling its interest in the Boston Red Sox, the New England newspapers, and perhaps -- its last salable asset -- the About.com group.
Plainly, the game is survival now. The core newspaper business is struggling for life everywhere, but the New York Times had special assets, including an unsurpassed brand name and a national presence. It might have been possible for a gifted leader to have steered the Times on a better course. Pinch publicly reassured his cousins that "innovative products and services across media platforms" would secure a bright future for the company. But his sweet words have proven to be blather.
His strategies have been poorly conceived and incompetently implemented. Pinch paid roughly half a billion dollars for About.com and a few other web properties that do not generate anything like a 14% return (the company's marginal cost of capital at the moment). He squandered over a billion dollars buying New England newspaper properties, now nearly valueless, except for the interest the Boston Globe had in the Red Sox.
In an unbelievably craven move, Pinch actually raised the dividend by almost a third in 2007, in the face of declining revenues and profits. This meant that the controlling shareholders, his family, received a one third spike in their income, as if to reassure that matters were under control. Or, if one were cynical, they got some of their money out while the company was still solvent.
Either way, the company is significantly weakened now, forced to strip itself of assets to meet its debts, and facing a collapsing market for newspaper advertising. The billion and a half dollars Pinch unwisely spent on acquisitions would go a long way right now.
Only a miracle -- a sudden rebound in the economy, the end of the internet, and a brand new mindset in the leadership of the company -- can save the company now. And I wouldn't bet on that trifecta. A "negative outlook" says it all. The handwriting is not just on the wall, it is in the securities rating.
Thomas Lifson is editor and publisher of American Thinker.
