Is The New York Times Collapsing?

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The extremely precarious position of the New York Times has been noted before on this blog, and now new information has come to light which requires an update.

The New York Times is in worse than bad shape; they’re declining rapidly and unless a huge cash infusion materializes, there is a distinct possibility the company will collapse because their debt is quickly becoming unserviceable.

Every metric available shows the New York Times has declined steadily in every area: the second quarter earnings per share was $.15 compared with $.29 in the second quarter last year. Second-quarter 2008 operating profit decreased to $40.3 million from $43.3 million in the second quarter of 2007. Excluding depreciation and amortization and special items, operating profit declined to $72.9 million in the second quarter of 2008 from $118.5 million in the second quarter last year.

Total revenues decreased 6.0 percent to $741.9 million from $788.9 million. Advertising revenues decreased 10.6 percent.

Compensation costs declined primarily due to lower incentive compensation (i.e. bonuses) and a reduced workforce in the second quarter of 2008 compared with the same period last year (i.e. lay offs). But it wasn’t just the reporters and sales people who have seen their livelihoods dry up. Compared to other media CEOs and executives, the New York Times’ compensation is positively anemic; President Janet Robinson’s annual salary is one million dollars. Her bonus in 2007 was $1,100,000 – out of a possible $2,000,000 – and the same bonus schedule is set for 2008 (meaning they do not expect there to be any availability of increase by the end of the year). By all appearances, they’re too strapped to even loot the company. I outright dismiss any possibility of fraud because there’s simply nothing to steal.

For the last four quarters, the New York Times’ assets have decreased and debt has increased.  At the end of the second quarter, cash and cash equivalents were approximately $42 million and total debt was approximately $1.1 billion. Without knowing exactly how the debt is structured, it is impossible to see the full context, but just glancing at the flat numbers, this is -objectively – a staggeringly terrible ratio.   After a series of downgrades on their commercial paper, S&P, Moody’s and Fitch have been threatening to downgrade their debt one notch to junk territory since July.    Such a downgrade would be catastrophic.

But the rating agencies aren’t the only ones nervous about the health of the company. The most alarming signal of distress comes from inside the company. Harbinger Capital Partners, the company’s largest shareholder (19.3%), has been dumping stock by lots of 200,000 shares since February 08.

Harbinger Capital Partners itself is interesting. It’s a hedge fund that is deeply entwined with the company, so much that the name appears in almost every financial filing of the company.
According to a press release, Harbinger Capital Partners manages in excess of $4 billion in capital through two organizations. Harbinger Capital Partners Master Fund I, Ltd. is focused on restructurings, liquidations, event-driven situations, turnarounds and capital structure arbitrage, including both long and short positions in highly leveraged and financially distressed companies.

Harbinger Capital Partners Special Situations Fund, L.P. is focused on distressed/high yield debt securities, special situation equities and private loans/notes in a predominantly long-only strategy.

A source tells me that Harbinger specializes in capital structure arbitrage – meaning financing companies with both debt and equity. The introduction of this fund into the New York Times financial mix reminds me of the $43 million /$1.1 billion cash to debt equation; it might just be, at this point, that the New York Times is worth more dead than alive.

Philip Francone, the general managing partner of the hedge fund, has been elected to a seat at the Board of the New York Times. Presently, his company continues to sell huge amounts of New York Times stock. The latest batch was for 200,000 shares on Friday, August 7, 2008, according to a Form 4 filed with the SEC. Thus, not only is the largest shareholder divesting, his role as board member seems to be counter-intuitive. In the interest of full disclosure, I do not know if Francone is personally enrolled in some executive stock selling plan – but I discount that as a possible explanation for the sales because he is not personally selling the stock, his hedge fund is.   

Incidentally, according to a Form 8-K, last week NYT and Harbinger formalized a derivative swap agreement (much like Enron’s Project Osprey) where if New York Times stock fell below a certain figure, it would have to pay Harbinger a standardized stock price, in addition to a slew of fees.   It appears that Harbinger is hedging its bets against the New York Times, a position that must be viewed with askance considering the complexities of that relationship.

The New York Times second quarter earnings showed a single ray of hope for sustenance: the internet. Ad revenues on the New York Times website were up nearly 20%. If I were advising the New York Times, I would encourage them to do what their customers are encouraging them to do: Stop printing. Focus on the internet since that’s where the money is. Think about the newspaper differently; if they can’t imagine stopping the presses, print every Sunday instead of every day. They might be able to eek out a little revenue from Sunday ads and they’d retire an enormous amount of debt almost instantly. But I do not believe the New York Times will ever countenance that plan.

The company has a long history of glorious news coverage, but that time is no more. Plagiarist journalists, journalists who continue to defy our national security, opinion pieces that are full of anti-American sentiment… I believe they’ve simply lost touch with their customers. And they don’t care.They believe that because they’re an institution that they can’t fail. But that is simply not true. New York Times’ revenues and profits are down because people don’t buy newspapers anymore and because people don’t like the New York Times anymore. But if any company was ever salvageable, it’s the New York Times. They can win back customers with better reportage. They can balance out their left-wing agenda with something approximating a right-wing tolerance.  They can also realize the world has changed. Newspapers aren’t the most organic way to get news anymore.

I believe the New York Times is in imminent danger of collapse. I believe that unless something dramatic happens within the next quarter, their debt will be downgraded to junk.  Once that happens, a collapse is virtually unavoidable.   A run on the bank will ensue and the company will go bankrupt.   There will be no government bailout a la Fannie Mae and Bear Stearns.   It will simply cease to exist.

Every passing day the debt increases and the New York Times continues holding on to the belief, stated by Janet Robinson, that the dismal numbers are due to an overall downturn in the American economy and have almost nothing to do with the newspaper itself.   That kind of willful ignorance is not acceptable.   If they’re going to change course, they must do it now – before the rating agencies downgrade.  It’s the last, best opportunity to save the company.  Unfortunately, I don’t think they are willing to hear the clarions.

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Tags: Bankruptcy, Business, Finance, Harbinger Capital Partners, New York Times, Philip Francone