With the newspaper industry already reeling from a perfect storm of recession, Internet flight and falling real estate prices, it’s hard to imagine how things could get much worse. Well, they just did. The bankruptcies and sales of several prominent Wall Street firms have severely tightened capital markets at a time when many newspaper companies are already groaning under the burden of enormous debt. The collapse of the mortgage industry will also drive down real estate prices, further crimping a vital source of classified advertising revenue. One analyst estimated that the total value of US real estate could fall from a high of $22 trillion to a low of $9 trillion before the healing begins. This will leave creditors will massive amounts of real estate assets that are worth pennies on the dollar. And there are few buyers available. As John Duncan explains in this insightful analysis, no one is giving credit right now, which drives prices lower and further limits the pool of available buyers.
With credit markets tightening, publishers have few places to turn to raise capital. Duncan cites the example of McClatchy which just restructured its debt payments. McClatchy’s debt is based on the London Interbank Offered Rate (LIBOR), which is the rate at which the world’s most preferred borrowers are able to borrow money. The LIBOR climbed to an all-time high of 6.88% this week, which Duncan estimates will cost McClatchy at least $1 million a week more in debt service payments than it expected just a week ago. The same dynamic applies to any other publisher looking to relieve debt loads. Restructuring will only force those costs further upward.
For businesses like Tribune Co., the news gets even worse. Sam Zell has been performing financial card tricks just to meet quarterly debt payments. His ace in the hole has been non-newspaper assets like the Chicago Cubs and Wrigley Field, as well as real estate picked up in the Tribune LBO. Those assets are now valued at significantly less than they were just a few weeks ago, meaning that Tribune Co. has far less leeway to leverage them to generate cash.
On top of all this, of course, is the worsening outlook on the revenue side. As the economy settles in to what is likely to be a protracted recession, ad revenues will shrink further. The real estate sector, which has traditionally been a profitable source of classified advertising revenue, will suffer most of all. Just look at the effect that the devastation of the Florida real estate market has had on newspapers there. Now imagine this scenario spread across the entire country.
Alan Mutter theorizes that even a broad recovery in real estate prices wouldn’t help very much. He notes that advertisers are spending a shrinking proportion of their dollars on newspaper advertising. The emergence of more-efficient online channels is sucking dollars away, meaning that even an unlikely quick recovery in large consumer markets like housing and cars would benefit newspapers disproportionately less than other media.
Duncan’s likely scenario is that cash-rich investors will sit on the sidelines until the carnage is complete and then enter the markets to buy properties at pennies on the dollar. This isn’t necessary a bad thing: “If newspapers were managed by new groups of people with no real romantic link to the glory days of newspapers, and freed from management grown fat and lazy on the easy profits of the glory days of American local newspapers, maybe titles can innovate again and start thinking about how they serve audiences better in print and online,” he writes. In other words, instead of saving the American newspaper industry as we now know it, the more likely scenario is that the business collapses completely and is reinvented by people who have no romantic attachment to earlier times.
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