From AJR, April 2000 issue
Who Will Be Next?
The Times Mirror deal may set the stage for sales of other family-controlled newspaper companies.
By John Morton
John Morton (email@example.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.
THE UNEXPECTED PROPOSED takeover of Times Mirror Co. by Tribune Co. for $8 billion in stock, cash and assumed debt casts the future ownerships of family-controlled newspaper companies in a new light.
If someone had asked me a week before this announcement about the probability of such a merger, I would have said that on a scale of one to 10, with one being the most probable, this deal would rate a nine or a 10. So much for my prescience.
Historically, prominent newspaper-owning families have been loath to part with their beloved properties. Newspaper families are different from, say, owners of green-bean canneries in having emotional ties to their businesses.
Even those less prominent in the newspaper business than Times Mirror's Chandler family usually hold out for as long as possible until they are forced into action by looming estate taxes or the lack of descendants willing or able to carry on.
So what happened at Times Mirror?
I suspect the answer lies in the fact that the last Chandler to have a strong emotional attachment to owning newspapers was Otis Chandler, former head of Times Mirror and former publisher of its Los Angeles Times. He has severed ties to the company except for his ownership interests. The Chandler family members who now control the company through various trusts, and with whom Otis Chandler has often been at odds, likely care more about preserving their wealth than owning newspapers.
Times Mirror has become primarily a newspaper company, after a series of divestitures conducted since 1995 by its chief executive, Mark H. Willes. It's easy to imagine the controlling Chandlers concluding that newspaper values today are as high as they've ever been and wondering what the values might be 10 years from now. Add on the tax benefits to be gained from the deal, and you come to the fundamental answer: This is about cashing out at maximum value.
The Tribune-Times Mirror merger, which will create the third-largest newspaper company measured by daily circulation (after Gannett and Knight Ridder), shows media companies are converging with a vengeance. The deal greatly enhances Tribune's store of local news and advertisements and furthers the company's strategy of marrying major newspaper and TV station brand names to establish a strong Internet presence. In a way, Tribune's gaining of Times Mirror's newspapers in Los Angeles, Long Island, Baltimore, Hartford, and in smaller cities is analogous to broadcasters grabbing as much spectrum as possible in markets across the U.S.
Newspaper companies were already unsettled by the implications of the huge pending merger of AOL and Time Warner. The Tribune-Times Mirror merger strikes closer to home. It makes what before was close to unthinkable much more probable with the remaining large, family-controlled newspaper companies.
Who might be next? There is no sure answer, but one way to consider the question is to review the actions of Wall Street investors. Of the 16 publicly traded newspapers that I follow closely, four had strong run-ups in share prices in the three trading days following the Tribune-Times Mirror announcement. This was accompanied by large increases in the volume of shares traded. A.H. Belo's stock rose 8.2 percent, Knight Ridder's 9.7 percent, Lee Enterprises' 7.6 percent and McClatchy's 6 percent. In effect, these companies are Wall Street's candidates for sale.
Dow Jones & Co.'s stock rose by less‹3.7 percent. This would be surprising except that the Bancroft family, which controls Dow Jones, has had some family dissension in recent years over the direction of the company. Dow Jones' recent strong financial performance may have ameliorated the discord. And of course there are privately held newspaper companies that could become candidates for mergers: nine of the largest 25 newspaper companies in the country as measured by daily circulation are privately held.
Poor financial performance certainly will not be a factor in driving future consolidations, since the industry has just come off a year of strong earnings and likely will have another. Using the publicly owned companies as a proxy for the industry (they control about 45 percent of total national daily circulation), the industry had pretax income growth last year of 18 percent and an average operating profit margin (earnings as a percent of revenue) of 22.2 percent.
As a sidelight on profitability, Tribune's operating profit margin for its newspaper operations last year was 29.2 percent‹highest of all the reporting companies. Times Mirror's was 18.2 percent. After the announcement, a reporter at the Los Angeles Times asked me how Tribune could publish such high-quality newspapers as the Chicago Tribune with such high margins. I told him he was sure to find out before long.