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 AJR  Columns :    THE NEWSPAPER BUSINESS    

From AJR,   October/November 2003  issue

From Employee- to Publicly Owned   

Why rising debt caused Journal Communications to go public--and what that means for its future.


By John Morton
John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.     

The Milwaukee Journal Sentinel has been among the most venerable of employee-owned newspapers, beginning with the creation of an employee trust in 1937 by owner Harry J. Grant that now owns 90 percent of the company. (Grant heirs own the rest.)

Over the years, though, the company has grown from a single daily and a local radio station into a complicated conglomerate known as Journal Communications, owning weeklies, television and radio stations, and telecommunications and commercial-printing operations in 23 states.

And like other employee-owned companies before it, Journal Communications has become hampered by the very nature of its ownership structure.

The cash employees have given to the company to acquire interests in the employee trust has been an important source of working capital. But employees typically have had to borrow from outside lenders to raise the cash, pledging their interests as collateral and relying on company dividends to meet personal loan obligations. (The "interests" are ownership units in the trust. The trust owns the stock.)

Unfortunately, this employee borrowing now amounts to $430 million and is, according to the company, "approaching the limits of prudent debt exposure." As the debt rises, the company could be forced to increase dividends, thereby diminishing the company's ability to finance growth.

The solution to this dilemma, the company's directors have decided, is to turn Journal Communications into a publicly owned company, with an initial offering of shares on the New York Stock Exchange to take place sometime this fall.

Now, this move raises questions about whether employees will ultimately lose control of the company. But management says they will not, because, like many family-controlled, publicly owned newspaper companies, the shares to be offered to the public will have weak voting power.

Under the plan, the employee trust will be dissolved, and in place of their interests in the trust, employees will receive class B shares with 10 votes each. (The class A public shares will have one vote each.) Heirs of the Grant family will receive class C shares worth two votes.

After the public offering, Journal Communications intends to propose to buy a portion of employee shares so that staffers can reduce their debt. Once initial trading restrictions lapse, of course, employees could sell their shares on the public market, but only after converting them to the weak-voting class A variety.

For the company, the advantages of going public include being able to use stock to make acquisitions and having a capital structure that would permit selling bonds and other debt securities to raise money for growth.

How would Journal Communications stack up as a publicly owned company compared with its peers? In revenue size, Journal Communications, with more than $801 million last year, is at the low end of a universe of companies with revenues ranging from $400 million to $6.4 billion.

Less favorable is the company's involvement in telecommunications and commercial printing. Its telecommunications network, connecting seven states in the upper Midwest, last year contributed more than 18 percent of revenue and nearly 36 percent of operating income. And the unit's two biggest customers, WorldCom Inc. and Global Crossing, are both in bankruptcy.

Commercial printing contributed more than 12 percent of last year's revenue but only 1.8 percent of operating income.

And then there are Journal Communications' profit margins. Last year the company's operating profit margin (operating profit as a percent of revenue) was 14.2 percent. By comparison, the publicly owned newspaper companies as a group averaged 21.1 percent.

Moreover, Journal Communications' publishing profit margin, at 9.7 percent, was woefully below the 22.3 percent posted by the publicly owned companies' newspaper operations. The Milwaukee Journal Sentinel's operating margin considered alone was better, at 13.5 percent.

One of the many joys of being a nonpublic company is not having to march to Wall Street's drumbeat, and ever-improving profit margins is one of the more insistent of Wall Street's demands. Journal Communications will not be immune to this.

Indeed, the company already has started on this journey. To reduce costs, the Milwaukee Journal Sentinel last year eliminated home delivery in all but the 12 counties in southeastern Wisconsin that make up the newspaper's core market.