'Perfect Storm' Hits Land

Tribune filed for bankruptcy protection Monday in Delaware, fulfilling the expectation of many that the company would buckle under the pressure of its $13 billion in debt. The questions was, how soon would it do so? Now we know.

Tribune's new owner Sam Zell characterized the financial situation as the "perfect storm." When the high pressure system of debt meets the low pressure system of rapidly declining ad revenue, you've got a storm. This tempest is not confined to Tribune's teapot. Storm clouds have been gathering over other newspaper properties and chains. But Tribune's bankruptcy filing is the first major indication that all hell is about to break loose:

• The New York Times reported that the Miami Herald is for sale. The Herald is owned by McClatchy, which itself is laden with about $2 billion in debt from its purchase of Knight Ridder. The most valuable part of the Herald is said to be its waterfront property, not the newspaper.
• Scripps has put the Rocky Mountain News, Colorado's oldest paper, up for sale. You knew that once Scripps entered a joint operating agreement -- remember them? -- with the Denver Post, the grave diggers were out somewhere digging a trench.
• The New York Times has put its spankling new building up for collateral to the tune of $225 million. Asked on NPR this morning what headline he would write for his newspaper, Bill Keller, executive editor of the New York Times, responded, "We Will Survive."

Doesn't sound like much, but the truth is, many papers are not going to survive. The changes in the industry are too monumental to ignore and, like the economic free fall we happen to be in, nobody knows where this is heading. And let's be perfectly clear: Many newspapers are still profitable, they're just not making as much money as they had grown accustomed to.

In an interview with Portfolio, Zell threw down the naked truth: He wished he had been a newspaper owner during the last 4o years, instead of the last year. Those 40 years were obscenely profitable, attributed in part to newspaper monopolies from coast to coast that allowed newspapers to charge advertisers whatever they wanted. Newspapers weren't making money; they were printing it.

The mint has closed. Nobody's printing money anymore. Newspapers are going to be skinnier, will have significantly reduced staff and will have a limited print run.

However, blaming the restructuring only goes so far. Each newspaper company has its own peculiar tale of debacle. In Tribune's case, it was Zell's leveraged takeover of Tribune that was built on a mountain of hubris. Many stories have described the Tribune financial buyout as "complex," as if this explains why Tribune is bankrupt. There's really nothing complex about it. Zell bought Tribune by putting up little of his own money, making employees "owners" and thus qualifying for a big federal tax break, and borrowing billions at a time when Wall Street was awash with dough. Very simple.

What failed was Zell's calculation that he could pull it off and pay it off. Tribune already had $4 billion in debt from its disastrous purchase of Times Mirror. Zell added about $8 billion to that. Even in the best of times, $13 billion in debt is hard to pay down. During hard times like this, well fuggetaboutit. The bankrutpcy petition listed Tribune's assets at $7.6 billion, for a negative net worth of about $5.4 billion.

To be fair, how could Zell know the industry was about to collapse? Industry veterans didn't even know. Incredibly, some still talk as though this a cyclical change.

Filing for bankruptcy is not necessarily a disaster. It will give Tribune some breathing room to figure things out because the bankrupcy court will keep creditors at bay. If creditors and courts agree, Tribune may be allowed to stretch out its debt payments over a longer period of time, allowing it to retain cash. Under the best circumstances, it will pay only a portion of its debt, not all of it. (Somebody's going to get stiffed.) However, Tribune will have to submit a plan to the court as to how it's going to generate cash and pay debt.

If Tribune and other newspapers are banking on an asset sale to see them through, the bad news is, newspapers are not worth anything right now. Any newspaper property that goes on the auction block today is going to go for a dime. It's almost not worth selling, Zell and others alluded in coverage of the banruptcy. Newspapers may be tempest tossed, but the money they generate can help pay down restructured debt.

And so one hurricane season ends, and another begins.