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Star struck

Copyright 2015

The Arizona Daily Star has become the thinnest of newspaper gruel.

It seems readers have noticed. In 2006, the Star’s weekday circulation was 103,708. It’s Sunday circulation was 161,975. In 2014, the Star’s daily circulation was 77,528, 25 percent drop. It’s Sunday distribution decreased to 124,007, 23.4 percent less. These numbers are from documents filed by Lee Enterprises with the Securities Exchange Commission. Lee owns the Star and many other newspaper properties.

The circulation decreases are happening as the area grows. Pima County’s population in 2006 was 981,110. In 2014 it was estimated at a shade over a million. The message is pretty much the same all over the country: As the population increases, newspaper circulation falls. In Tucson, the trend is a bit more pronounced.

Since 2005, when Lee purchased Pulitzer Newspapers, Lee has struggled to manage its enormous debt. The company purchased Pulitzer at the zenith of the market, just before it suffered losses from Internet inroads and a severe economic downturn. The decline started in 2006. Lee and all other newspapers have not fully recovered. The days of cheerful 33-percent profit margins seem long gone.

Here’s what the company said in last year’s 10K SEC filing: “At September 28, 2014, the principal amount of our outstanding debt totals $804,750,000. At September 28, 2014, our debt, net of cash, is 4.7 times our 2014 adjusted EBITDA, compared to a ratio of 4.8 at September 29, 2013.” (EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation . It is a measure of operating income. It does not include debt service, of which Lee has in abundance. Last year’s 10K said the company spent more than $30 million to service its debt.

A recent company news release said Lee had paid off a portion of debt from the Pulitzer purchase two years early. The balance of the payment was made to BH Finance LLC, a subsidiary of Berkshire Hathaway Inc., which is controlled in large part by Warren Buffett, the investment genius and of late a fan of Lee Enterprises. There was a balance of $9 million left on the loan. Mary Junck, chairman and chief executive officer, according to the release, said the reason for the early pay-off was “the company’s strong performance and substantial cash flows.”

The value of Berkshire Hathaway’s 88,863 shares of Lee stock is about $270,000, a modest investment for a company whose shares sell for more than $214,000 each. Thus Berkshire Hathaway’s investment in Lee is equal to fewer than two of its own shares.

Lee’s 10k makes no other mention of debt held by Buffett & Co. It reported that three banks hold the paper: Deutsche Bank ($400 million), JP Morgan ($250 million) and Wilmington Trust ($150 million).

On Februrary 1, 2005, The Associated Press reported this badly written story:

“Lee Enterprises Inc. is buying Pulitzer Inc. — publisher of the St. Louis Post-Dispatch founded by famed newspaperman Joseph Pulitzer — in a $1.46-billion deal that Lee says would give it the nation’s fourth-biggest roster of daily newspapers.

“Davenport, Iowa-based Lee said the acquisition would make the company fourth in numbers of U.S. daily newspapers with 58 dailies in 23 states. Lee has 44 daily newspapers in 19 states.

“Lee will pay $64 a share in cash for Pulitzer, which owns more than 100 weekly newspapers, shoppers and niche publications.

“Pulitzer shares rose 56 cents to $63.46 on the NYSE. Lee shares rose 64 cents to $44.55 on the NYSE.”

Today, Lee’s share price is a bit over $3.

In 10 years, Lee has managed to retire around $600 million in debt. I can only guess how much it has cost to service and renegotiate the debt. It appears in bits and pieces amid the rubble of its 10K filings.

Obviously, the company is struggling. It’s market cap is but $186 million. This means that the company owes about four times more money than it’s worth. According to Yahoo Finance the stock’s short ratio is about 9 percent. This means about 9 percent of its shareholders are betting the stock will drop.

After years — make that decades — of speculation, Gannett — Lee’s partner in Tucson — shuttered the Tucson Citizen in May 2009. The two companies benefitted by eliminating Citizen newsroom and newsprint expenses.

Speculation on the Star’s fate today is sparse if not absent. So allow me to fill the void. There is an economic argument for Gannett to buy out its Tucson partner. Gannett’s Phoenix operation includes the huge Arizona Republic and a TV station. If it were to acquire the Star, it could reduce Tucson production costs by printing the Star in Phoenix. It could consolidate newsroom and advertising expenses.

The Republic’s other — and perhaps more appealing — choice would be to buy the Star and kill it. That would permit it to publish a Tucson edition of the Arizona Republic. Its statewide dominance would be nearly complete.

If that seems a bit cynical, consider what Hearst did when it owned the San Antonio Light and bought the San Antonio News-Express. Hearst killed the Light. No sense publishing two papers when one will make more money.

While we’re on the topic, there once was a time when idealism had a role in newspapers. There was much to be said about the nobility of the free press, the First Amendment and (quoting Joseph Pulitzer) “comforting the afflicted and afflicting the comfortable.” But the good intentions and idealism have gone the way of the buggy whip, yielding without much of a peep to the ways of the balance sheet and the vagaries of profit and loss.

Nowhere is this picture more vivid that in Lee’s depressing predicament. It is the squeeze mode, coaxing every penny from the expense column. It has put the historic Post-Dispatch property in downtown St. Louis up for sale. Lee announced a round of cutbacks in St. Louis as well. Seems the new squeeze is on in anticipation of huge debt payments due in 2017.

It may come to pass that the company can pay its debt only by selling some newspapers — even at bargain prices. The Star might be one of the more valuable properties, and go a long way toward retiring its great debt. It would be preferable. The Star has been squeezed so much that it is barely alive.


The Star reported this month its president and publisher, John Humenik, is off to greener and colder pastures, being named by Lee Enterprises to take charge of the Wisconsin State Journal and other area papers. Humenik came to Tucson in 2005. A Lee executive said of Humenik’s Tucson reign:

“With John’s leadership, the Arizona Daily Star has delivered outstanding results in every aspect of our business — from magnificent journalism and service to the community to powerful results for advertisers — leading to rapid audience growth and impressive financial performance.”

The statement might be true.

Under Humenik, classified ads disappeared, which was/is an industry-wide sad fact. Some of the Star’s news sections disappeared, the Accent section, a feature section. The Sunday TV listings was removed from the paper and sold as a separate item. The local news section, “metro and region” makes an appearance but once a week on Sundays. And those cutbacks reflected an aggressive cutting of both news staff and newsprint use, the two greatest costs of newspaper production.

During Humenik’s watch, Tucson Newspapers enticed the grocery stores to move their advertising from direct mail to the newspaper. Back in the day, grocery stores grew irritable at newspaper pricing because of constant increases and arrogant attitudes. That was before the bottom fell out. The grocery stores have returned. Fry’s ads seem to dominate. The use of the gate-fold wrappers that cover the first news section and often the Sports section may annoy readers, but the advertisers just love it. It is a rare day indeed that Star readers don’t have to  struggle to remove the gate-fold wrapper from the Front Page. The gate-fold is that flap of newsprint on the front. In addition to Fry’s, Jim Click sells cars, Jack Furrier sells tires using the gate fold.

While I suspect Humenik had nothing in particular to do with it, companies that sell stuff to an aging America have gravitated to newsprint newspaper advertising. Hence, the impressively depressing flood of hearing-aids, residential retirement  and assisted living developments and, of course, the toothless full page ads for dental implants. The spirit of Walter Brennan lives in those ads.

But the statement concerning “rapid audience growth” requires some further explantion, expansion, and elucidation. There very likely was and has been online audience growth. But for the newsprint version of the Star, the one that lands on doorsteps and becomes fishwrap, there’s been a decline.

The year-end 10-K report filed in 2004 by Pulitzer Inc., which owned the Star at the time, said the Star’s print circulation was 106,618 daily and about 62k greater on Sunday. This would be just before Humenik landed at the Star. Today, as he leaves the Star eight years later, the daily print circulation is 77,547, Sunday’s circulation is 123,162; this is according to the latest 10-k report, which was released on December 13. This represents a drop of 29,071 or 27.3 percent during Humanik’s watch.

The trend is accelerating:

                       2004                           2006               2012               2013

Daily             106,618                     104,731         82,305           77,547

Sunday         168,000                     156,694         133,558         123,162

Daily Circulation dropped 5k from last year to this; Sunday circulation dipped by 10k. If ever there was a no confidence vote, this is it.

This is not all of the story. In 2009, the Tucson Citizen ceased publication. In 2004, the combined daily circulation of the Star and Citizen was more than 138k. When advertisers bought ads, they appeared in both papers. This is because in terms of economics the papers were partners, operating under a joint operating agreement (JOA) sanctified by Congress in what should be regarded in hindsight laughingly as The Newspaper Preservation Act (1971).

This was in effect a monopoly that would have violated the Sherman Anti-Trust Act if the newspaper industry — already heavily anointed with privilege and approbation by the Founding Fathers in the First Amendment — had not been exempted. The Congress passed the exemption based on the logic that communities benefitted from having two newspaper voices. Thus, the newsrooms were to be maintained separately while the sales, distribution and production costs were shared according to some formula. In Tucson, the partners split profit and cost 50-50.

JOAs, however noble in intent, present enormous barriers to newspaper competition. But if one of the JOA papers nonetheless goes out of business, there is no residual notion of preserving two voices. The Citizen went kaput. But its owner, the Gannett Co., still retains half the profit and expense, as per a contractual agreement. As for the Citizen’s voice, it is but a faint, online squeak.

The point of this digression is to emphasize that the Citizen’s sad demise did not translate into additional circulation for the Star. More than 30,000 former Citizen subscribers decided to do without a newspaper rather than subscribe to the Star.

The Star’s circulation decreases reflect a sharp decline in Lee’s financial health, which at this point is rickety. The decline of its stock value has been widely reported along with the supposedly generous compensation awarded its top boss Mary Junck. The effect of the huge burden of debt the company acquired when it bought Pulitzer Inc. in 2005 has not been well reported because it is difficult to understand.

Some of the provisions of the interest payments evolved around Libor, which stands for the London Interbank Offered Rate. This is the rate banks charge for money. There is currently a scandal widely unreported in the United States, but duly noted in Great Britain, that Libor rates were manipulated by various agents. Here is what Lee says in the 10k is its exposure to those Libor rates (The language is allegedly English):

“Our debt structure and interest rate risk are managed through the use of fixed and floating rate debt. Our primary exposure is to LIBOR. A 100 basis point increase or decrease to LIBOR would, if in excess of LIBOR minimums discussed more fully below, decrease or increase, respectively, income before income taxes on an annualized basis by approximately $6,095,000 , based on $609,500,000 of floating rate debt outstanding at September 29, 2013.

“Our debt under the 1st Lien Agreement is subject to minimum interest rate levels of 1.25%. Based on the difference between interest rates in December 2013 and our 1.25% minimum rate, LIBOR would need to increase approximately 91 basis points for six month borrowing up to approximately 109 basis points for one month borrowing before our borrowing cost would begin to be impacted by an increase in interest rates.

“At September 29, 2013 , approximately 71.9% of the principal amount of our debt is subject to floating interest rates. We regularly evaluate alternatives to hedge the related interest rate risk.”

The 10k notes that Lee still owes more than half the money it borrowed to finance the purchase of Pulitzer Inc. Lee paid $64 per share to acquire Pulitzer, which has to be one of the luckiest sales in the history of the industry and certainly makes Michael Pulitzer a financial genius. And on the other hand, Lee’s CEO Mary Junck looks like one of P.T. Barnum’s born-everyday suckers. She continues to be well-paid for her colossal error and many consistently unsuccessful efforts to reverse the company’s continuing financial misfortune.

Junck’s company shelled out $89,477,000 in interest expense in 2013. Since 2009, Lee has listed $363,763,000 in interest expense. This current 10k report states that Lee owes $847,500,000 in principal and is obligated to pay $208,788,000 in interest. This amounts to a bit more than $1 billion. Lee bought Pulitzer for $1.46 billion eight years ago. The debt burden combined with the huge drop in revenue offers no room to maneuver.

The first thought is that perhaps Junck & Co should sell off assets to pay back debt. It did sell its Hawaii paper and another in Escondido, Calif. It made some money and lost some. But if the company sells its assets it also decreases its revenue flow.

The company may find a way out of the morass created by Junck & Co. But the possibility is that it might not. And the company admits it in a section devoted to risk factors: “We May Have Insufficient Earnings Or Liquidity To Meet Our Future Debt Obligations.”

Lee likes to tout the fact that it operates in noncompetitive markets. But it is not gaining circulation because it cannot figure a way to create a better product with fewer resources. Lee is a conventional corporation that happens to own media products. Its attitude toward its products — newspapers — is about the same as Proctor & Gamble’s attitude toward its products. Stuff is stuff, and selling one thing is about the same as selling another. Lee has a long list of personnel on its management team. They are in charge of stuff like finance, strategy, human resources, same stuff as P&G; soap or newspapers, same stuff.

But news is not a conventional product. It is not, for example, subject to the law of supply and demand, at least not in the conventional sense. And good news is not the same as a good story. Bad stories can be good stories maladroitly rendered — badly written, incompletely reported, badly edited, misplayed and misunderstood — rather than a bad soap bar. Marketing 101 doesn’t account for these differences. In fact, you might ask whether Yellow Journalism was the first instance of what we now call mass marketing. If so, it’s worth remembering that the practice was pioneered by newspaper editors less interested in money and much more preoccupied with attracting readers by running hot-stuff stories. This was long before Marketing 101 ever poked its nose into a business school curriculum.

The best illustration of this difference is in “City Editor,” a book published in 1934 by Stanley Walker, the city editor of the New York Herald Tribune. Here Walker explains the city editor’s job: He notes that, “the city editor has one of the best jobs which journalism has to offer. He can mar his paper, or help make it great. There are dull stretches, but usually there is not time to do all the things that cry for doing. The job is run by organization, but it must be, in some aspects, unconventional, for news itself is unconventional.”

In my career as an editor, I found it best to be conventional, to follow the generally accepted ways of newspaper management, do the expected thing, go along, get along. I worked for a family paper for a while in which journalism was kept upper most in mind. Then it became a corporation, where the requirement was to put profit first. I had some moments when I might swerve off the conventional path, but not so anyone would much notice or care. I would have invited big trouble if I had been consistently unconventional. I cannot actually define “unconventional” as it relates to news as in, “that’s a good story.” It’s a lot like Potter Stewart, the Supreme Court justice who said he could not define obscenity, but knew it when he saw it. It certainly consists of more than “man bites dog.” I think a newspaper could attract a great following in these dismal newspaper days, but only if it were led by a latter-day Charles Dana or Joseph Pulitzer. He or she would have to have the dedication and the power to run a paper against all convention.

While I also can’t really say what it might mean to be unconventional, I have run into one sterling description of the sort of newspaper that once drew  readers by the thousands. Ben Hecht’s autobiography, “A Child of the Century,” published in 1954, contains this superb passage:

“There was Arthur James Pegler, the salty and verbally crackling father of Westbrook, the mighty columnist-to-be. Pegler, pere, was the inventor of the blood-and-thunder rhetoric which became known as the Hearst newswriting style. He wrote once, in a magazine tale, a description of the thing he helped create: ‘A Hearst newspaper is like a screaming woman running down the street with her throat cut.’ ”

Definitely beyond Marketing 101. And anything John Humenik would mess with.