Why NYT may have to go private
Newsosaur blog
To comfortably maintain control of the New York Times Co., the Ochs-Sulzberger family may have no alternative but to follow the Tribune Co. in a highly leveraged transaction to remove their company from public ownership.
Based on the economics of the pending Tribune deal and the insatiable appetite of junk-bond investors willing to finance aggressively leveraged transactions, NYT Co. could take itself private by increasing its $1.5 billion debt load by up to three times.
In that event, as discussed previously here, the transaction might well require sharp reductions in the abundant staff, bureaus, travel budgets and other resources that make the New York Times the newspaper of record for the world's largest and most powerful democracy.
The family may have no choice about taking the company private, owing to the escalating pressure from dissatisfied public shareholders to abandon the two-tier stock structure that gives the clan effective control over a company whose operating profits of 16.3% in the last 12 months seriously trail the industry average of 23.5% (see graph below).
Two major groups of public shareholders are asking fellow investors to withhold their votes for the management slate of directors at the annual meeting on April 24. The two-tier stock structure gives the family 9 of the 13 board votes – and thus effective control of the business until such time as the structure is modified. So, the company is in no immediate danger of a change of control.
(UPDATED: See additional discussion in Comments section below.) However, the disenchanted investors have the means to intensify pressure on the family to either (i) give public shareholders more control over the business, (ii) sell the company or (iii) follow Tribune's lead by buying out the public holders to take the company private.
Unless the family wants to exit the newspaper business (and there is no sign of that), then private ownership would seem to be the most appealing of the three alternatives.
The NYT Co. could purchase its outstanding public shares for about $4 billion, assuming a 20% premium over the stock's current value of $23.42 a share. The family could finance the purchase by taking on more debt, selling assets and/or raising cash from a compatible investor willing to hold a minority stake in the business.
Given the generous tax benefits associated with an employee stock ownership plan, the family might elect to take a page from the Tribune deal by adding an ESOP to its going-private plan. But the same end could be achieved without one, too.
If the $4 billion required to buy the stock were added to NYT's existing debt of $1.5 billion, the resulting debt burden would be a prohibitively high 11 times the company's operating profits of $511 million in the last 12 months. By contrast, the contemplated financing for Tribune, which would make it one of the most leveraged media companies in the land, is 9.2x its trailing earnings before interest, taxes, depreciation and amortization.
But NYT's debt would be reduced to 9.8x earnings at the conclusion of the pending sale of its television group for $575 million. The company's leverage could – and probably would – be cut to a more manageable level by selling some or all of such assets as:
:: The ailing Boston Globe and its associated properties, whose value in my estimation is about $650 million.
:: The International Herald Tribune (estimated value: $150 million).
:: The company's 58% stake in its glitzy new Times Square office tower (estimated value: $500 million)
:: Elements of its regional newspaper group (estimated value of the entire group: $900 million).
NYT bought About.Com for $410 million in 2005 but is unlikely to part with its largest new-media franchise.
The more properties the company sells, the more it could reduce its debt and the less it would be forced to cut operating expenses at the New York Times. Thus, the future of the crown jewel of American journalism may well depend on how many other jewels the family is willing to sell.
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