Journal Sentinel Jumps on Sinking Ship
Prospectus shows all 13 newspapers the new Journal company absorbs are losing money.
March 11 is Decision Day for stockholders of Journal Communications Inc.
That’s when they’ll attend a “Special Meeting,” as its called, to vote on whether to approve its proposed deal with the E. W. Scripps Co. The meeting is largely pro forma, as approval is expected, but some will vote no, and you can understand why. While a sale of the Milwaukee Journal Sentinel was probably inevitable, the deal its CEO Steve Smith chose will have a huge — and probably negative — impact on the state’s largest newspaper. The details are all there to see in the prospectus sent to shareholders.
As I’ve previously written, the “merger” trumpeted by the Journal Sentinel is really a buyout by Scripps: it will absorb all the Journal broadcast companies and Scripps’ shareholders will also own 59 percent of the stock in the new company being formed, Journal Media Group, which will own the Journal Sentinel and 13 longtime Scripps newspapers.
The revenue of the 13 Scripps newspapers, all in smaller markets than Milwaukee (the Memphis Commercial Appeal is the biggest of them), has steadily declined from about $433 million in 2010 to $384 million in 2013 and a likely additional decline in 2014. Worse, the newspapers lost money for the last five years, by an average of $19 million annually from 2011 through 2014.
The Journal Sentinel’s estimated revenues and expenses from just its newspaper operation shows revenue declined from about $176 million in 2010 to about $153 million in 2013 and a likely further decline in 2014. The newspaper, however, made a small profit, averaging about $5 million in annual profit from 2011 through 2014.0
So when the two operations combine, they will yield a money-losing company. The prospectus shows a combined net loss of $8.6 million on combined revenues of $537.5 million in 2013, and a combined net loss of $19.4 million for the first nine months of 2014 based on total combined revenues of $384.1 million. Which suggests layoffs of staff will have to be made.
Odds are the cuts will have more impact on the Journal Sentinel. It’s the only newspaper that has “fat” from a net revenue perspective, as the others are all losing money. The many prizes it has won in recent years (including three Pulitzers) bespeak a staff big enough to do enterprise stories, something these smaller Scripps papers probably don’t do. Newspaper chains typically slash staff more, so it may be tougher to cut the Scripps papers’ staff without hurting the product and readership.
But several other factors may increase costs and pinch revenue, which could ultimately require more staff cuts. As the prospectus notes, “We will need to either contract for or internally develop a number of key services that our parent companies [Scripps and Journal Communications] have historically provided…including finance, treasury, tax administration, risk management, accounting… legal, regulatory, human resources, employee benefit administration…information technology” and many other functions.
The Journal broadcast companies significantly subsidized the Milwaukee newspaper and the figures for Scripps suggest some of that was happening there. But as the prospectus for Journal Media Group notes, “We will no longer be able to rely on Scripps and Journal for diversification of business risks or to provide capital resources.”
Given all this, its hardly surprising the prospectus says “we do not anticipate paying any dividends in the foreseeable future.”
The prospectus shows the combined daily circulation for the 14 newspapers has dropped from 896,000 in 2009 to 735,000 in 2013, or 18 percent, while combined Sunday circulation dropped by 15.4 percent. And it predicts that print advertising, which has been going through a meltdown, will continue to be “the largest component of our operating revenues.”
A continuing decline in print subscribers and advertising is all but certain. “We expect print subscriptions will continue to face pressure as readers find alternative sources to obtain news and information content, including on mobile and other digital platforms,” the prospectus notes. “This expected decline in circulation may impact revenue.”
As I’ve written before, newspaper inserts (rather than ads running in the newspaper) have become an ever bigger proportion of dwindling print ads, yet those are likely to decrease. “Advertising revenue may decline as fewer newspaper inserts are delivered with the printed newspaper,” the prospectus notes.
The company can hope to increase online subscribers, but online ads generated from this nationally continue to raise about one-eighth (or less) of what print advertising makes. The prospectus doesn’t directly address this issue.
The document all but shouts out the priorities of the typical corporate boardroom, where it’s all about compensation for executives. Many, many pages of the 123-page prospectus are devoted to discussing how executive compensation will be handled, while shareholder rights gets just a few pages and the fate or value of employees gets no mention whatsoever. The next round of staff cuts, as in the past, will happen quietly, with not one word in the paper about a long-time reporter’s contributions to the publication.
Of course this is just for starters. As the prospectus notes of Stautberg: “Future incentive opportunities, both annual and long-term, will be established by the Compensation Committee.”
But no one will ever know these future amounts, because the company intends to keep this a secret. The prospectus notes that under the federal JOBS Act, Journal Media Group will be classed as an “emerging growth company,” meaning it’s exempt from reporting and disclosure requirements of federal law. The prospectus, however, notes that JMG’s leaders have “irrevocably elected not to avail ourselves of this exemption,” with the exception of how it handles the requirements under the Sarbanes-Oxley Act to disclose executive compensation and to hold an advisory vote on executive compensation. The company may choose to exempt itself from these provisions for up to five years, even if it has a negative impact on the company’s value. “We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions,” the prospectus confesses.
Just in case that isn’t enough protection for executives, the company’s articles of incorporation “may impede the ability of holders of common stock to change our board or management.” Stockholders are prohibited from acting by written consent and prevented from nominating directors without advance notice and directors may adopt a rights plan (often called a “poison pill”) making it “more difficult for a potential acquirer to obtain control of us.”
All told, the new Journal Media Group doesn’t sound like a company whose initial stock offering is likely to thrill the market.