Why Steve Smith Sold the Journal Sentinel

While the “merger” of Journal Communications Inc. and E.W. Scripps has continued to generate commentary, nothing much has been written to change our conclusions about its likely impact.

As I wrote, this is really a buyout of the Journal that is likely to continue the reduction in the paper’s editorial staff. It will now be part of a new newspaper chain, Journal Media Group. As Milwaukee Magazine Pressroom columnist Erik Gunn notes: “Other newspaper chains – Tribune Co. and Gannett among them – have moved to centralized copy desks that serve several papers. That’s saved money, but insiders suggest the editorial results have been mixed at best.”

Meanwhile the role of Journal CEO Steve Smith in this buyout has gotten more scrutiny and it hasn’t been positive. Perhaps the most intriguing has been a column by an anonymous but savvy blogger for Uppity Wisconsin, who argues the impetus for the sale may have been the company’s debt which stood at $208 million by last fall.

The company’s annual report, filed in the fall, shows the debt had risen from $41 million by the end of its 2011 fiscal year to $208 million in its last report.

As I previously reported, the broadcast side of the company was costing less and generating more revenue than the newspaper and Smith, who came from the broadcast side, put great emphasis on trying to buy more TV and radio stations.

As businessman and former Milwaukee Sentinel business editor John Torinus wrote for the Biz Times, “his company’s highly leveraged balance sheet from broadcast acquisitions brought Journal Communications to its knees” during the Great Recession.

But Smith continued trying to build that empire. “It’s fair to say that we were putting emphasis on the broadcast side of the business in terms of where we were putting investments,” Smith told Rich Kirchen and the Business Journal.

The purchase of more broadcast entities seemed the only way to increase revenue, but also added to debt. “So why do the deal” with Scripps? the Uppity Wisconsin blogger asked. “My guess is that Journal Communications felt compelled to dump some of its debt.”

Nearly every report about the deal has mentioned that the newly formed newspaper group, Journal Media Group, will have not a dollar of debt. “We said ‘Let’s make sure we give this company the best opportunity to be successful,'” Smith told Kirchen. “Let’s send it out with no debt.”

But the price for that was high, as Smith had “to sell off those treasured TV/radio stations he acquired,” Uppity Wisconsin observes. Scripps got Smith’s entire broadcast empire (with Journal Communications shareholders getting a minority share of Scripps). And Scripps also got a majority of stock in Journal Media Group.

The reality is that Smith’s “acquisition-minded course to make the firm a much bigger multimedia player, mainly buying TV and radio outlets… didn’t go as well as expected on the financial side, except in the case of Smith’s own fortunes,” notes Uppity Wisconsin.

In one year alone, “he took home $2.2 million in compensation, including base salary, bonuses, changes in pension value, various other perks and the value of stock options. Meanwhile, the firm he oversees earned $22.2 million for the year. Yup, that’s right: Smith’s pay was equal to ten percent of the company’s entire net earnings in 2011,” Uppity Wisconsin writes.

“Even as Smith was being rewarded for overseeing a decline in JCI shareholder value and further cuts to the Journal Sentinel’s editorial operations,” the blogger continues, “rank and file employees struggled as they have for years with picayune pay, frozen pensions and work overloads.”

Smith’s final payout will be a golden parachute worth $8.7 million, which is his reward for handing his company over to Scripps.

As Torinus observes, “these kinds of mergers are much more likely to happen when a CEO nears retirement. It’s a final grand stroke, and a juicy departing paycheck for change of control generally accompanies the deal.”