by Mark Hengel
Posted 7/14/2008 12:00 am
Updated 11 months ago
A small debt produces a debtor; a large one, an enemy.
The Roman author who coined the phrase couldn't have known how well he was describing the crisis facing many newspaper companies more than 2,000 years later.
Two companies that own newspapers in Arkansas are facing debt that is an enemy. However, the state also has two companies that still have cash for possible expansion.
"When people talk about the crisis in the newspaper industry, it is not really a crisis in newspapers," Robert Picard, editor of The Journal of Media Business Studies, said. "It's a crisis of debt."
Picard, a media economist in Brookline, Mass., said the 1990s saw many newspaper companies borrowing against their market capitalization to finance the expansion of their newspaper chains.
The companies, he said, assumed the properties could continue producing margins that have traditionally been between 20 and 30 percent. However, profits at many papers have shrunk in the new millennium due to a combination of increased competition, rising costs and a slowdown in advertising.
Few newspapers are actually losing money, but the reduced profit margins have the highly leveraged companies struggling to service their debts.
Morris Communications of Augusta, Ga., purchased Conway's Log Cabin Democrat in the mid-1990s, during a period of acquisition. The company recently sold 14 papers to raise money to pay down debt, but even after the $85 million payment, Morris remains $418 million in the red, according to a Securities & Exchange Commission filing.
Moody's Investors Services, which rates bonds, now rates Morris' bonds as Caa1, low even for junk-bond status. The rating means that Moody's believes there is a 35.7 percent chance Morris will default on its loans, something Morris said in May was a possibility.
Last month, Morris announced that it would discontinue the company match on the employee 401(k) program. The move appears to be a cost-cutting measure to help raise money to further pay down the company's debt.
GateHouse Media of Fairport, N.Y., which owns eight papers in Arkansas, is also struggling with its debt. The company had total debt of $1.2 billion at the end of 2007, according to the company's annual report.
The company's Arkansas properties include daily newspapers in Arkadelphia, Helena, Hope and Stuttgart.
In the annual report, the company said that its debt might endanger dividend payments and basic operations.
"There can be no assurance that our business will generate cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs," according to the annual report.
GateHouse has lost money for three straight years: $240.7 million in 2007, $28.9 million in 2006 and $14.1 million in 2005. GateHouse's bond rating at Moody's has been downgraded to B2, which is junk-bond level and means the company's chance of default is estimated at 19.9 percent.
While Morris and GateHouse struggle under their debts, Wehco Newspapers Inc. of Little Rock and Stephens Media of Las Vegas, owned by Little Rock's Stephens family, are feeling a slowdown but are not struggling.
"If you don't have any debt and your profit margins are off, you still have a profit," Paul Smith, president of Wehco Newspapers, said. He did not say how profitable the company's papers have been.
The company's only debts are in low-interest loans that funded the construction of presses in Little Rock and northwest Arkansas, which the company could pay off, Smith said.
Though Wehco does take risks, such as competing with the larger Arkansas Gazette during a 12-year newspaper war that ended in Wehco's victory in 1991, Walter Hussman, president and CEO of Wehco Media, has never taken on huge debt to purchase newspapers. Smith said the company paid cash for its most recent acquisitions, three newspapers in central Missouri, though he did not disclose the price.
The company could also expand. Smith confirmed that Wehco is still considering - as Arkansas Business first reported in May - buying three daily papers from Landmark Communications: The Virginian-Pilot of Norfolk. The Roanoke Times of Roanoke, Va., and the Greensboro News & Record in North Carolina.
The company's largest paper, the Arkansas Democrat-Gazette, saw advertising revenue drop in 2007, Smith said, but that was the first decline since 2002.
While other companies have announced cuts in light of dropping revenue, Smith said the paper does not plan any cuts - in newsroom budget or circulation area - to make up for the decline.
"There have been other times when profits have fallen off, and not one time has [Hussman] said 'cut expenses,'" Smith said. "When others cut, the business never all comes back because they lessen the quality of the newspaper."
Smith said Wehco's investments in its newsroom and circulation area are justified because the paper has a higher circulation than many papers in larger markets. Picard said Wehco is also helped by the company's diversification. The company owns 13 cable television companies along with its newspapers. The cable companies provide steady income because they charge monthly subscription fees, Picard said, and that regular income helps offset the ups and downs of newspaper ad revenue.
Wehco has also launched a couple of "niche" publications - Sync, aimed at the young adult audience that general circulation newspapers covet, and the forthcoming Arkansas Life, a competitor to Arkansas Business Publishing Group's Soirée and Arkamedia LLC's Inviting Arkansas.
Sherman Frederick, president of Stephens Media Group of Las Vegas, would not disclose whether the company has any debt, but said the company is in good standing. The company owns 23 papers in the state, including The Morning News in Springdale, the Pine Bluff Commercial, the Southwest Times-Record at Fort Smith and seven weeklies in central Arkansas.
"We feel that we are positioned as well as any newspaper company in Arkansas," Frederick said, before expanding the statement to include the nation. "We feel that no matter what happens with the industry, we are in a good place."
The company's advertising revenue has slowed, he said, especially in the classified sections, but the Arkansas properties are not feeling the pains experienced by papers in Florida, California and other larger markets.
Frederick said he expects newspapers to languish through 2009, and possibly into 2010, but the company's papers will not cut staffing.
The trouble other media companies are facing, and the declining price of newspapers, might also cause the company to explore expanding.
"We are interested in any newspaper in Arkansas," he said. "That's what everybody is wondering: Whether there are going to be any bargains out there."
The Small Papers
The industry wide downturn in revenue is hurting smaller newspapers as well as large ones.
Weston Lewey's company, Times-Herald Publishing Co., publishes two papers in St. Francis County, the daily Forrest City Times-Herald and the weekly Marianna Courier-Index. As a publisher of smaller papers, Lewey said, she is insulated from the ills facing many larger newspapers.
Lewey's family has owned the papers since the 1940s, she said, and has long since paid off any debt. Advertising revenue has dropped during recent months, though, while expenses have risen - particularly newsprint, the grade of paper on which newspapers are printed, and gasoline.
"When the prices go up like this and my advertising revenue doesn't follow, it squeezes us," Lewey said.
The publishing company had to raise subscription prices this summer, after having already done so in September, to compensate carriers for the rising gas prices.
With expenses rising, Lewey said, one of the only cost-cutting options she could consider was printing a tighter paper, though she said the newspaper had no intention of shrinking its work force. The paper also quit printing a television programming schedule.
The decreasing price of newspapers on the open market does not scare Lewey, she said. The family does not intend to sell, she said.
"When business is good, you don't want to sell the paper, and when business is bad, you'd better not sell the paper," she said.