Is the Journal Sentinel for Sale?

Yesterday, the Milwaukee Journal Sentinel’s Pulitzer-Prize winning reporter Mark Johnson, a former board member of the employees guild, posted a Facebook message to members:

“Does anyone have thoughts on what, if anything the Guild, ought to be doing to prepare for a possible sale of the paper? I’m not trying to scare anyone, but there was talk about this yesterday after news broke that the family sold all of their stock. This follows the filing a couple of weeks ago in which one of the company’s largest stock holders, Gabelli & Co, said Journal Communication should sell the newspaper to Warren Buffett or someone else with deep pockets.”

The sale of the newspaper could be a disaster for employees. Odds are any buyer would institute “efficiencies” by laying off yet more reporters. But that would also be a disaster for this community, nay this state, because it could further diminish the ability of the newspaper to effectively cover the news. The JS is still the state’s biggest journalistic entity, and there is nothing on the horizon primed to take its place.

It’s possible Johnson and others in the newsroom are worrying for nothing. But I think a sale could be imminent. For starters, Journal Communications Inc. stock has recovered significantly in the last year, rising from $2.74 in October to $5.61 today. If you’re going to sell, now’s the time, as the potential purchase price may be as high as you’ll ever get. Indeed, the company’s recently released second quarter report is quite gloomy, offering ample reason to think that much worst times are ahead. Meanwhile, the fact that the company has suddenly purchased all the stock owned by the Grant family gets rid of an issue for a potential buyer, clearing the way for a sale.

As recently as eight years ago, newspapers were still fat and sassy, classic cash cows, with most of the cash coming from classified ads. But those ads have quickly gravitated to the internet. Meanwhile, attempts to recoup that with online advertising have been a struggle: typically publications earn about one-tenth online of what they did in print. Then add in the Great Recession, and the loss of display ads from companies that went out of business or can no longer afford to advertise, and you have a recipe for disaster.

But the Journal Sentinel compounded all these problems by deciding to become a publicly traded company in 2003 — ending its days as a private company with a famed employee stock plan —  just at a point when the media meltdown was about to commence. The stock’s value at first dropped gradually but the pace sped up and by March 2009, it had lost almost 98 percent of its value. It took six shares of stock, by then down to 36 cents, to buy a Sunday paper.

The impact for employees was disastrous. Journal Communications never had anything more than a token pension plan. Your pension was the company stock, which for six decades before the public sale had risen ever higher in value. Some employees had retired with as much as a million dollars in stock. Now employees who held stock worth hundreds of thousands of dollars had seen its value drop to almost nothing.

In the last year the stock has made a minor recovery: it’s now at about one-third the value of when the public sale commenced. But to judge by the second quarter report, it’s not likely to rise much higher. The iffy projections of the report are almost comically telegraphed: “We often use words such as ‘may,’ ‘will,’ ‘intend,’ ‘anticipate,’ ‘believe,’ or ‘should’ and similar expressions in this Quarterly Report… These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors.”

If you had any doubt about all those qualifiers, the rest of the report makes clear that times are not good for the Fourth Estate on 4th and State.

Curiously, outside experts are relatively cheery about the company’s prospects. Investor’s Place calls JRN (the symbol for the company’s stock) a good buy. The Motley Fool says the company’s operating margins suggest the company “is doing fine.” On other hand, the traditional stalwart Morningstar offers a ranking that includes some positives (good relative to the industry in price/earnings and operating margin), but still gives the company an F for profitability and a D for growth.

Then there is the Warren Buffet factor. Buffet was long a fan of the Washington Post, feeling its high penetration of the local market and unique product made it a bulletproof buy. Of course that was before the internet revolution, but he has lately been buying newspapers again. Buffet would certainly like the Journal Sentinel’s market penetration: it has typically ranked first or second  in this category among newspapers in America, depending on whether you’re measuring daily or Sunday paper sales.

Will Buffet or someone subscribing to his philosophy be interested in buying the Journal Sentinel? That appears to be the hope of Mario J.Gabelli, a famed Wall Street investor once dubbed “Super Mario” for his shrewd value-based investments. Gabelli’s GAMCO Investors Inc. began buying JRN stock after it began to tank. He eventually bought enough to become the company’s largest shareholder and has been hovering around the Milwaukee company ever since. In June, GAMCO disclosed it now had a 16.3 percent stake (7,230,308 shares) in the company, up from 11.32 percent (5,022,808 shares) at the end of March. Is Super Mario betting a pending sale — and a resulting bump in the share price — is coming?

The company’s buyout of the Class C stock owned by heirs of Harry Grant, the former Journal CEO who created its employee stock plan back in 1937, could be a sign a sale is coming. The company just repurchased all 3,264,000 outstanding shares of the C stock, in exchange for some $6.2 million in cash and the issuance of 15 promissory notes pledging to pay another $25.6 million with interest at a rate of 7.25 percent per year.

The incentive to buy out these stockholders is that they had considerable power: their stock gave them two votes per share, the right to designate a board nominee, the right to approve strategic transactions, and minimum dividend guarantees. Eliminating these stockholders gives the company more freedom to act; the heirs of Harry Grant might oppose selling the newspaper.

If the newspaper was sold, the company would be left with 35 radio stations and 14 television stations in 12 states and some other holdings. Of course, it’s also possible the entire company could be sold. In Milwaukee, the newspaper and WTMJ radio and television stations increasingly work together.

The idea of Warren Buffet as savior is attractive because he would be less likely to slash payroll. If a newspaper chain, by contrast, were to buy the paper, the triage would be ugly; the latter-day era of the Journal Sentinel as a Pulitzer Prize-winning publication would come to an inglorious end.  And Harry Grant, I suspect, would soon be rolling over in his grave.

Short Takes:

–An early version of this story wrongly described Mark Johnson as a current board member of the employees union and said Mario Gabelli began buying stock after it hit bottom; he actually began buying after it lost more than half its value.

-If you missed my piece on Paul Ryan, it prompted an interesting comment from former Milwaukee School Board member Bruce Thompson, who knows something about budgets, and notes that Ryan’s roadmap actually has no budget breakdown.