Sunday, August 07, 2011

Lee Enterprises, Inc’s 3rd Quarter Report: Black & White & Red All Over (guest essay)

8th in a series on troubles at The Post-Star and its parent Lee Enterprises

by Mark Wilson

The Iowa corporation that owns the Glens Falls Post-Star, Lee Enterprises, Inc., released its third quarter financial statement late Friday afternoon. As any reporter will tell you, the vacant lot between the close of stock markets Friday and Monday’s opening bell is where you go to bury bad news.

While many of the headlines from Lee’s SEC filing were made public soon after the fiscal quarter ended on June 26th, the aggregate bad news and the details of the measures the company is undertaking to stay afloat make for compelling and distressing reading.

The Big Picture
Lee Enterprises lost $155.5 million over the last three months. That compares to last year when they gained $10 million for the same quarter, and 2009—at the bottom of the recession—when they lost only $24.5 million. Even if Lee repeats last year’s fourth quarter gains (unlikely in what looks like a secondary recession) it will outpace its 2008-09 recession year losses by nearly $10 million or 7.85%.

Revenue Loss
While representatives for Lee Enterprise (including management at the Post-Star) continue to accentuate the increase in online ad revenue (up 22% over last year), those sales amount to only 12% of total advertising income. Combined print and digital advertising lost 5.6% over last year with real estate ads leading the decline (down 20%). Revenue from circulation was off .4%, a figure that reflects the unfortunate tug-of-war between the increased newsstand and subscription prices at some of Lee’s papers and the drop-off in readership.

Layoffs and Benefit Cuts
With revenues plunging and material costs on the rise, Lee has resorted to the one revenue stream under its control: laying off staff and cutting back on employee and retiree benefits. Lee saved $4 million over the last three months through layoff, buyout or “coerced attrition.” Full time equivalent employment at Lee (a term that balances out full and part time labor) decreased 4.8% from last year. (these savings were offset by increased $1.6 million “workforce adjustment costs” (outsourcing, contract labor, etc.).

Lee also saved $4 million by eliminating post-retirement medical coverage for its employees and freezing some pension benefits. Ominously, the report looks ahead to decreasing these operating costs another 4-5% in the coming quarter.

Corporate Debt
Lee Enterprises continues to struggle beneath a $1 billion debt burden which comes due in eight months. This picture may soon brighten,however, if only for the short term.

Reporters Mike Spector and Matt Wirz for the Wall Street Journal broke the story last Wednesdaybthat Lee has approached its principal lenders with a new plan for reorganizing its debt. The new plan divides the current debt obligation into three parts: $675 million in first lien senior debt; $175 million in second lien debt; and $175 new bond debt. The senior debt holds an interest rate of 7.5% over a term of four years (compared to the 4.25% they are paying now). The second lien debt holds an interest rate of 15% over five years (compared to 10% now paid on the debt remaining from the purchase of Pulitzer newspapers) and offers lenders a 13% stake in the company. Lee’s lenders Goldman Sachs and Monarch Alternative Capital have tentatively agreed to hold the publisher’s second tier debt in exchange for the over 1/8th ownership stake.

If the new arrangement holds to the previous terms (apart from interest rate and maturity dates) a very rough calculation of Lee’s new debt looks something like this:

•$675,000,000 over 4 years at 7.5% interest (in quarterly installments) comes to $197 million/year
•$175,000,000 over 5 years at 15% interest (in quarterly installments) comes to $50 million/year

When combined, Lee will have to come up with about $147 million/year to satisfy its creditors (before even considering the new bond debt service). This payout would be 2.25 times larger than the $109 million debt service it managed to come up with this past year. For an advertiser/subscriber/investor–dependent company going into the second wave of a national recession, this will be a very tall order to fill.

In the increasingly likely event that Lee ultimately fails to meet the new debt obligations and declares bankruptcy, the new arrangement with its banks sets up a dynamic similar to the Journal Register Company, which emerged from its 2009 bankruptcy last month as the privately-held property of the hedge fund Alden Global, the newspaper’s principal lender.

Anyone who was disappointed three years ago in their newspaper’s failure to hold financial institutions accountable for the nation’s real estate and stock market collapses will not see this infiltration into the publishing sector by many of the same banks as a move in the right direction.

Late in the week, following news of the debt refinancing plan and in anticipation of the quarterly report, Lee’s stock dropped to a 2-year low of 68¢ per share.


Mark Wilson said...

It is worth noting that as of Sunday, the Post-Star, which has everything riding on Lee's fate, covered its parent corporation's news with an AP wire story. The online story—placed on the "stocks" web page rather than "business"— did not mention the newspaper's connection to the corporation.

The failure to accept or recognize the imminent death of a parent is sad enough. When that parent is in the process of driving all the kids off a cliff in the family station wagon, the failure is simply pathetic.

Mark Wilson said...

Error correction:
Owing to a typographical error in the fourth paragraph from the end, I misstated the annual amount of debt service Lee Enterprises, Inc. will need to come up with under their refinancing plan. The actual amount is $247 million, not $147 million.

Anonymous said...

I come up with $103.2 million based on 675 x .075 +175 x .15 + 175 x .15 = 50.6+26.3+26.3 = 103.2 Not sure if your figure of $247 includes principal payment.

Mark Wilson said...

I plugged the numbers into a standard web-based loan calculator with the amount of each loan (675 & 175 million) and the interest rates (7.5 & 15%) paid off quarterly (which is the case with Lee's present debt) over the duration of the loan's (4 & 5 years) then multiply the quarterly payments by four to arrive at the annual payment.
>>>$196,891,696.92 + $50,373,468.12 = $247,265,165.04<<<

This figure does not include the additional $175 million line of credit, as I could find no mention of the term of that loan nor the interest rate.

Anonymous said...

Lee came up with the $109 million plus the interest on the billion dollars in debt of around $50 million. They therefore had almost $160 million available for principal and interest. The new loan likely requires interest only payments and they can pay as much principal as they want to. If things hold constant they could pay about $50 million per year and then refinance a smaller balance when the term is up. Does not look too bad.

Mark Wilson said...

You are correct in saying that the $109 million was pay down of principal on the debt. I had misinterpreted the figure as principal plus interest. Still, at 4.25%, interest on the billion plus balance came to $42.5 million (plus). Added to the principal, Lee's payments in service of their debt obligations would still be $95 million shy of what they would be paying under a new agreement (not counting a refinancing of $175 million of the third leg of their debt). And as for an interest-only loan, I doubt the banks would agree to it. Lee has restructured the original debt twice since 2005, creating the ballon payoff-upon-maturity that they now face. I suspect the agreement that they will report this coming week will be as encumbered with covenants as the current contract.

Pat said...

It so sad to hear what Lee's fates. I wonder if it would recover sooner.