'Goodwill' Gestures Hurt Newspaper Earnings Outlook

Article excerpt

No sooner was the Christmas season of goodwill toward men over than the season of newspaper goodwill write-downs started again. As they did last year, chains so far in 2008 have taken some hefty goodwill "impairment" charges, or warning that they soon would.

The new year was all of 24 days old when Belo announced it would take a first-quarter, non-cash charge of $370 million related to goodwill impairment at The Providence (R.I.) Journal and at The Press-Enterprise in southern California, a state hit hard by the real estate collapse. McClatchy, with papers in California and Florida, soon followed with a massive $1.4 billion after-tax write-down after executives warned it would be a necessary move. This was in addition to the $1.3 billion charge it took in November 2007.

Goodwill in its simplest form is calculated by subtracting the worth of tangible assets of a business (such as presses or buildings) from the fair market value of the company. Goodwill consists of those intangible assets that would include a newspaper's brand and perceived strength in its market, something that must be evaluated at least annually to see if it has lost value. If that happens, a company takes an impairment charge to its income.

While the impairment charge is a non-cash charge, it nevertheless lowers earnings on the books. And after decades of enviably high goodwill, newspapers in the last year have been forced to fess up on their books that they've lost value in the market.

The New York Times Co. was one of the first publishers to lead the impairment-charge parade in January 2007, when it announced a $735.9 million write-down on its troubled New England properties -- a stunning drop in value, considering the company shelled out $1.3 billion for The Boston Globe and Worcester, Mass., Telegram -- Gazette in 1993. In January, the company took another charge of $10.5 million.

Impairment charges were all but inevitable following several years of declining ad revenues, shrinking circulation among big papers, and, especially, a series of would-be blockbuster sales that served only to show that the values of newspapers were faltering.

Tribune Co.'s auction, for example, not only failed to stir much interest from traditional newspaper companies, it ended up changing hands in a going-private deal for $8.2 billion -- just $200 million more than Tribune paid to buy Times-Mirror in 2000.

After bragging it got a bargain when it acquired Knight Ridder for $4 billion, McClatchy did manage to sell for fairly lofty multiples the 12 so-called "orphan" dailies from that deal. But it also shook the industry by unloading the Star Tribune in Minneapolis just 10 months later for the fire-sale price of $530 million. That's about half the amount it paid for the prestige property in 1998 -- and a multiple, according to some analysts, of just 6.5 times cash flow. With the two back-to-back write-downs, McClatchy has effectively written off half the value of its Knight Ridder purchase.

Add to that Wall Street's profound disenchantment with the newspaper sector, and the issue of goodwill impairment became impossible to avoid.

By Alan Mutter's calculations, the market value of publicly traded newspaper publishing companies at the end of 2007 had fallen by $23 billion (or 42%) since 2004, which he characterizes as the last good year for the industry. And most of that damage, the San Francisco-based newspaper and new media consultant says, came in just the past year.

Like other newspaper executives, McClatchy CEO Gary Pruitt plays down the significance of the impairment charge. "It's important to understand that this non-cash charge does not reflect our view of the long-term health of the newspaper industry or McClatchy," he said in a statement about the Q4 2007 results. "In fact, if we were able to base the valuation on our discounted cash flow analysis and recent transactions, our current level of goodwill could be sustained. …