Operational fixes loom for reorganizing publishers

by Ben Fidler

Updated 01:52 PM, Feb-10-2010 ET

With the calendar flipping to 2010, the sea change for newspaper and magazine publishers is well under way. Hordes of such companies are dealing with the harsh reality of what bankruptcy pros say is now a record three straight years of declining advertising revenue.

"2010 will be the fourth consecutive year [of ad revenue declines]," says Loughlin Meghji + Co. managing director Kevin Shea. "When you take that kind of economic calamity in ad-driven media and bounce it up against what is largely a fixed-cost business, cash flows dropped like a stone."

Indeed, it is incumbent on any company looking to survive the maelstrom to not only rationalize its capital structure but also take a long, hard look at operations and develop a new business model. As a result, a wave of restructurings has begun, with some media companies flocking to bankruptcy court for help and others potentially on their way.

Crushed by both the ad revenue drop precipitated by the recession and debt loaded on when financial markets were booming, many magazine and newspaper entities are either operating under Chapter 11 protection or newly emerged from it.

But while 2010 already has seen major newspaper publishers Affiliated Media Inc. (Jan. 22) and Morris Publishing Group LLC (Jan. 19) go under, following filings by media brethren Heartland Publications LLC (Dec. 21), Triple Crown Media Inc. (Sept. 14), Freedom Communications Holdings Inc. (Sept. 1), Reader's Digest Association Inc. (Aug. 24), Cygnus Business Media Inc. (Aug. 3) and others in 2009, the cases, for the most part, have one common thread — they center on prenegotiated plans or sales that largely serve as financial restructurings. As such, while companies are revamping balance sheets and altering ownership structures, the most pressing question is still out there: Will these restructurings be enough to foster long-term success? And if not, what really needs to be done?

A poll of those well familiar with media restructurings has yielded a common sentiment — there is no easy answer, nor a singular working business model to try to emulate.

"Usually, either a financial or operational restructuring is required," says Tyler Nurnberg of Kaye Scholer LLP. "This is one of those unique situations where you need both."

For the most part, the media bankruptcies taking place appear to be balance sheet fixes. Reader's Digest is wiping off about $1.6 billion in debt through a debt-for-equity swap. And two of the year's largest new debtors, Affiliated Media and Morris Publishing, have engineered prepackaged reorganization plans whose chief aims are to lop off large chunks of debt.

But as Nurnberg explains, several factors are working against the success of such restructurings: Subscriber levels may never return to where they once were, and a number of classified ads, which were once a staple in driving ad revenue, have moved to the Internet. As a result, the business model that used to work is evolving.

"People are going to have to skinny down the model and see if they can make it work with less debt and less revenue," Nurnberg says.

Will it be enough? Likely not, at least not to ensure long-term success. Shea and Karen Garza of Loughlin Meghji explain the more substantial challenges for newspaper and magazine publishers await outside of bankruptcy court, where companies are loath to remain while addressing such issues.

"My fear is that the people operating these companies blame the ad recession and not the fundamental issues that affect [the industry] broadly," Shea says.

Garza notes that the recession has forced newspaper companies to "get real" about the cost of providing their services to customers. She lists items such as distribution networks, frequency of publication and head count that newspaper entities should try to rationalize in the effort to lower their cost structures and says the key question for the survival of newspaper publishers is just how to financially capitalize on the transition to online media.

As an example of the shift, Jeff Jones of Barrier Advisers Inc. recalls recently riding a train from Wilmington, Del., to New York and noting that some 70% of the people on the train were using Amazon.com Inc.'s Kindle.

"Think of what that does for the top line revenues of newspaper companies and advertising revenues," he says, also mentioning the threat posed by competitors such as the recently announced iPad of Apple Inc. and other new technological devices. "It's just going to accelerate the drop in [traditional] readership."

Media companies such as Morris Publishing and Affiliated Media depended on ad revenue for more than 70% of their total revenue and accordingly have seen their fortunes plummet during the recession. One emerging answer to the revenue loss has been to transition to paid online content. Some papers, such as The New York Times, have announced their intentions to do so as a way to boost revenue and replace lost ad dollars.

"I think the challenge is going to be that you really need the entire industry to make that move," Shea says, noting that individuals forced to pay for online content from one paper may simply shift to another free one. "I understand why [companies are] pursuing it, but I'm not sure how successful it will be."

Barrier's Jones is a bit more optimistic, believing that if a newspaper outlet offers the right "price-value tradeoff" and "content that is truly good and unique, that people will pay for it."

To be sure, time will tell. But for newspaper publishers, survival may come down to creativity on the part of executives and a brand that consumers are willing to pay for in the digital age — all signals that the real work for such companies is ready to begin outside of court. — Ben Fidler