Is the Times Ready for a Newspaper War?

"The Times will try to compete....But you have to pay Carlos first"

The newspaper business is a reliable investing trap. Just ask McClatchy (MNI), which in 2006 swallowed Knight Ridder only to see its stock fall from $50 to 50 cents before rebounding to $7. Even News Corp.'s (NWS) Rupert Murdoch has had to write down $3 billion after paying $5.6 billion in 2007 for The Wall Street Journal.

Why, then, is Murdoch committing $30 million to launch The Journal's New York section on Apr. 26? Because he sees an opening in his fight against New York Times Co. (NYT), which was so strapped for cash last year it had to pay Mexican industrialist Carlos Slim 14% for a $250 million loan; servicing the debt costs the Times $35 million a year. Advertising plunged 25% in 2009. Murdoch's move "is aimed at kicking the Times when it's down," says Alan D. Mutter, an influential media analyst and blogger. "The Times will try to compete with as much resource as it can muster. But you have to pay Carlos first."

A local section in The Wall Street Journal is a thrust at the Times' base, a chance to poach department store and luxury ads, explains Ronald Weintraub, the former publisher of The New York Sun, which took a shot at the market from 2002 to 2008. The Times has 44% of its weekday circulation in the New York City area; high-end retailers overwhelmingly place their newspaper ads in the daily. The Journal derives an estimated 15% of its circulation from the region, so it is offering deep discounts for its Apr. 26 local launch. Saks Fifth Avenue (SKS) has signed on.

"There's no question a price war with Rupert would hurt," says Moody's (MCO) analyst John E. Puchalla, who argues that debt management is now the top priority for the business side as the paper pays for a decade of financial missteps. The Times has written off almost $1 billion of its assets over the past 10 years—about 38 cents for every dollar of capital, according to New Constructs, a research firm in Nashville. Rather than hoarding cash as the newspaper business declined, the Times paid out more than $400 million in dividends from 2005 to 2008.

In 2004 it sold its old headquarters for $175 million; the property was flipped for $525 million just three years later. In 2006 the paper reported a group's interest in buying The Boston Globe, which it acquired in 1993 for $1.1 billion, for at least $550 million. Management passed. It finally put the money-losing paper up for sale last year, only to cancel the auction. In 2007 the Times hiked its quarterly dividend by 31% and boasted of its high yield—then killed the payout in February 2009 to save $35 million (again, the amount of its annual interest payments to Carlos Slim). "The Slim deal is a transfer of wealth that never should have happened if they had managed their cash better over the years," says David Novosel, an analyst with researcher Gimme Credit. The Times declined to comment for this story; News Corp. would not discuss the details of its rollout.

Recently, investors have been sanguine about the Times. From a low in February 2009, its publicly traded stock has tripled, to $12.80 a share. Circulation is 959,000 on weekdays, while the Sulzbergers' supervoting shares shield the paper from raiders and activists. Yet according to data compiled by Bloomberg, the Times' balance sheet has little slack left. Cash is down to $36.5 million, compared with $56.8 million last year. The company has been lowering debt—from $1.06 billion to $769 million in the last year—but the burden remains high compared to its market capitalization of $1.86 billion. And management actually had to use the high-interest $250 million Slim loan to pay down debt that carried lower rates. Reinvestment has ground almost to a halt, while customer collection times have spiked.

All of which helps explain why Murdoch is pushing forward. "This could be a money-losing venture for the Journal," says Richard Dorfman, managing director of media investment shop Richard Alan, "but a potential big winner for Rupert if he's able to throw the Times over the edge of the abyss."

It's also Murdoch's idea of a good time. As he said at the National Press Club in April, "We've been involved in all type of media wars, yes, and I've enjoyed them." Even if he snatches away not a single Bloomingdale's ad, News Corp. will still have revenue more than 12 times that of the Times. That buys an awful lot of ink.

The bottom line: Given its stretched finances, Times Co. can ill afford a costly war.

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