Dallas without The Morning News?

Mike Simonton of Fitch Ratings is one-for-one. Which is not a good thing for Dallas’ Only Daily Newspaper.

Simonton has written a report for Fitch, a bond rating company, that is both blunt and terrifying: "Fitch believes more newspapers and newspaper groups will default, be shut down and be liquidated in 2009 and several cities could go without a daily print newspaper by 2010." One of the companies that Fitch tracks is Tribune Co., which owns the Chicago Tribune, WGN, and Chicago Cubs. Simonton told me last week that there was a real possibility that Tribune would default on $13 billion worth of bonds. On Sunday, Tribune said it was considering bankruptcy protection to forestall an imminent default.

Does Simonton think The Morning News is in similar trouble?
Simonton said the report does not address specific newspaper companies, since he has not seen their books. But he said the current newspaper environment is punishing even companies like News parent A.H. Belo, which has tens of millions, and not tens of billions, in debt. That’s because revenue is declining so quickly –18 percent for the industry in the third quarter this year – that newspapers can’t cut costs enough to keep up with the decline. “There are newspapers operating below their break even EBIDTA [cash flow] even before you take debt into account,” he said. In addition, Fitch sees newspaper revenues decreasing 10 to 15 percent each of the next two years

This explains the stunning drop in newspaper stock prices last week when the third quarter ad figures came out. Belo fell to $1.64 a share, Star-Telegram owner McClatchy fell to $1.85 and even the New York Times slumped to $6.97 a share – its lowest price in 25 years.

So where does The News fit into this scenario? Again, keep in mind that Simonton did not talk about Belo. He described a situation where newspapers might be forced to close when revenue collapsed, the company couldn’t pay its debt, and there were few costs left to cut. And I’m certainly not saying that Belo is in danger of closing. But here are Belo’s particulars:

• In the quarter ended Sept. 30, Belo lost $17 million. That compares a $3 million loss in the previous quarter. Figuring cash flow is more problematical, since the company only has three quarters of history.

• It had to borrow $10 million to pay its bills, mostly related to employee buyouts.

• Perhaps most importantly, the company cut operating expenses in the third quarter by 1.2 percent from the same period a year ago. However, revenue declined 5.8 percent from the second quarter — which means cost cutting is not keeping up with revenue decline.

Finally, Simonton noted that most newspapers are limited in what they can do to cut costs, other than layoffs. And, at some point, you can’t lay anyone else off. That’s why The News and the Star-Telegram have agreed to share some stories and to deliver each others’ paper in areas where they don’t compete. It won’t save much, but every bit helps. Simonton also said that it’s possible that some struggling papers could eliminate home delivery a couple of days a week and try to move readers to their Internet site, which would cut costs.

Frankly, this is mind-boggling. How can Belo, which has traditionally been one of the most financially sound media companies in the country, be in these straits? Some of it is the complete collapse in newspaper revenue nationally, which no one could have expected. Some of it is complacency. As recently as the beginning of the decade, Simonton said, a typical newspaper had margins of 25 to 30 percent; that is, its revenue exceeded its operating costs like rent and salaries by 25 to 30 percent annually. With numbers like those, it probably seemed like the gravy train will never end.

But it looks like it has.


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