The dramatic announcement that Moody's is contemplating lowering the debt rating of the New York Times Company prompted Jack Risko of Dinocrat.com to take a look at the debt—financed acquisition of about.com a year ago. He does not like what he sees:

The New York Times is evidently quite proud of its peculiar and extravagant non—core acquisition of About.com, since it was honored with the only graphic representation of any business segment in the Times Company's 10K, filed with the SEC last month. About.com was acquired by the Times a year ago for $410 million in cash. Both the huge price for this acquisition and this transaction structure seemed inappropriate to us — unless the Times was swimming in cash — since About.com has only made $11.8 million in profits since its acquisition on March 18, 2005. In other words, if the NYT paid 5% interest on the $410 million in debt necessary to buy About.com, annual interest expense would be over $20 million, well in excess of the profits earned by that little business. (By way of contrast, the Times' News Media Group had operating profits of $558 million as recently as 2003.) Moreover, About.com, as an internet site, seemed to us to have a risk profile greater than the Times as a whole, which is a diversified media company. Therefore, prudence would suggest to us that a risky operation of little profitability should be financed with equity, not straight debt, if somehow About.com was even worth its extravagant price tag. This is a lesson from Corporate Finance 101.

Jack knows a thing or two about buying (and selling) companies. It is obvious to me that, despite his his seveal weeks' worth of training in the Advanced Management Program at Harvard Business School, Pinch does not. Of course, they don't hand out grades at the AMP, so who knows if he followed the course work all that well? Perhaps he wasn't able to bring his friend Mr. Moose to class, and the resultant anxiety got in the way of mastering the concept of discounted cash flow analysis.

There is a dramatic narrative being written at the Times these days, as the blood of the Sulzberger line thins by the generation. Pinch has taken a jewel of a media property and pulled off a series of poorly conceived acquisitions, including the purchase of Affiliated Publications (publishers of the Boston Globe), and the Discovery—Times Channel, a cable outlet I have yet to find a single viewer of among my friends and acquaintances.

Moody's warned of weak cash flow. That means that debt service and other expenses may eventually pinch (pardon the expression) the dividends received by members of the Sulzberger clan, who control the election of directors. They may be indifferent to the stock price, but the dividend is another matter entirely. Their lifestyles may be cramped if the dividend is cut. That is not in immediate prospect, but the green eyeshades gang at Moody's obviously thinks there is some concern about cash flow, and when cash is tight, one either sells off assets, cuts expenses, or takes a hard look at the necessity of sending out such large checks to shareholders.

The Times is already cutting back in the newsrooms of its papers. Newspapers and television stations (the biggest assets of the NYTCo) are not pulling down top dollars any more, so selling these are not attractive options for generating cash.

Keep an eye on that dividend.

Thomas Lifson   3 19 06