Sunday, December 18, 2011

Down by the Levy: the Sinking of Lee

(a continuing series by contributor Mark Wilson on the troubles at Lee Enterprises, Inc. and the Post-Star)

On April 22nd of this year, the Mississippi River, nearing historic levels, jumped its banks and rose to within a city block of Lee Enterprises’ Davenport, Iowa headquarters.

Inside, financial and executive officers for Lee—the corporate owner of the Glens Falls Post-Star—were planning a junk bond issue large enough to pay off nearly a billion dollars in debt that was coming due within a year’s time. The subsequent failure of the junk bond issue ten days later set off a slide in the company’s stock price, as well as its fortunes, that came to a head last week when Lee sought Chapter 11 protection in a Delaware bankruptcy court. Court papers tabulated by Bloomberg News revealed that Lee and its subsidiary companies had—in the vernacular of real estate bank foreclosures—been under water all along.

Total assets: $1.2 billion
Total debts: $1.3 billion
Net worth: minus $100,000,000

In the initial stage of the bankruptcy case, Lee was granted permission to borrow $40 million more to pay bills, meet payroll and keep its presses rolling. The rest of the bankruptcy proceeding will determine whether or not Lee can extend the due dates on its outstanding debts from 2012 to 2015 and 2017, in exchange for double-digit interest rates. Most of Lee’s creditors have already signed on to the refinancing plan, and it is widely seen that the bankruptcy court will play along. The hope underlying the new debt timeline is that within three years the economy will recover enough to rescue the paper with real estate, automobile and jobs advertising revenue, and that by 2017 news publishers will have figured out how to better monetize their internet traffic and stem the collapse of their print audience.

While the courts sort out the longterm picture for Lee, it might be well to consider a more immediate threat in the company’s path. Back in July, the New York Stock Exchange issued a compliance warning to Lee when the price of its stock slipped below one dollar. The warning stated that if the share price did not regain the dollar mark within a six month “cure period,” the exchange would remove Lee from its trading list.

A useful primer on the significance of a stock delisting can be found online at The NYSE Listed Company Manual, Section 802.01 C addresses the delisting timeline for companies whose stock price drops below one dollar.

In short, Lee’s one remaining hope to avoid delisting would be if its stock were to close over one dollar per share on January 6th 2012, having sustained an average closing price of one dollar or more over the previous 30-trading-day period.

Fifteen of those thirty trading days have already elapsed with Lee’s daily closing share price averaging only 65 cents. So starting Monday, Lee’s share price must close at or above $1.35, and keep that price (on average) for three straight weeks. This at a time of year when many portfolio managers are tidying up client accounts by killing off their biggest turkeys. To put it bluntly, Lee’s thirty-three-and-a-half year association with the New York Stock Exchange is over.

Apart from the general stigma of joining the ranks of Fannie Mae, Freddie Mac, Lehman Bros. and MF Global, perhaps the most troubling consequence of delisting is that it may well trigger the automatic sell-off of stock holdings by many of Lee’s institutional investors (many pension funds restrict their investments to listed stocks). This in turn could set off a chain reaction run of individual stockholders, driving the share price—and any chances of eventually paying off its debts—to historic, even unsalvageable depths.

1 comment:

Stephen said...

Well, this doesn't really doom Lee. If they get delisted, it wont mean the company is out of business. It doesnt even mean that they cant do a stock sale. It just means that they cant sell their stock on the NYSE.
Back in 2009, Lee was gonna get delisted and so they put forth a motion for a reverse stock split. All the market requires is a plan with a timeframe to raise the stock price, which a reverse split would do handily. Lee is in big bad trouble... But this one i am not so worried about.