Gosh, I know a company that you can buy cheap!  The company is Lee Enterprises (headquartered in Davenport, Iowa), publishers of the Winona Daily News and 52 other newspapers throughout the country.  On February 21, 2007 Lee stock closed at $33.97 a share.   By October of 2007 Lee stock was selling for $14.75 per share.  Now Lee is a “penny” stock, closing on December 12, 2008 at 49 cents a share.  What a deal!  Or maybe not…..

According to a November 11, 2008 article by Carl Jackson, who writes for Sedonia.biz, Lee Enterprises has suspended its annual stock dividend as part of an agreement with a group of financial institutions that hold well over $1 billion of company debt.  Interest rates on the debt have been increased by the lenders, undoubtedly to compensate them for the increased risk of holding Lee’s debt.  Lee has also stopped contributing to the 401k’s of its employees.

As a long-time subscriber of the Winona Daily News, I know firsthand that Lee is trying to slash costs at its La Crosse, WI printing facility.  The width of the paper has narrowed.  The newsprint is so thin that when you flip a page (if you’re nimble enough to pry them apart), the corners curl up.  Presently, the only item delivered to my door that feels like a real newspaper is the free, twice-weekly, locally published, Winona Post.

Lee’s problems are common in the newspaper publishing industry.  Internet site revenue has increased at the expense of falling newspaper ad revenue.  Falling revenue, coupled with higher publishing costs have put a profit squeeze on most publishers.  Furthermore, many of the publishers are carrying too much debt.  The Minneapolis Star Tribune skipped a $9 million quarterly debt payment in September to conserve cash.  Even the New York Times is in financial trouble, planning to raise cash by borrowing $225 million against its Manhattan headquarters building.

The king of newspaper debt is the Chicago Tribune, which declared bankruptcy on December 8th.  The Chicago Tribune has $13 billion in debt, largely due to the leveraged buyout of Sam Zell who took the firm private.  The Chicago Cubs and Wrigley Field are owned by the Chicago Tribune.  Now that the Trib is such big financial trouble, maybe Zell will make quick work of selling the Chicago Cubs.  Last year Sam floated the idea of selling naming rights to Wrigley Field; an abomination in the mind of Cubs fans.

It would be fortunate if publishers could simply mortgage real estate and solve their cash flow problems, but the real problem is that these publishers have operating losses.  Like Chrysler and General Motors in the auto industry, the existing newspaper business model simply doesn’t work in the world of cyberspace.  Why would people buy newspaper ads when they can list and sell their items free on the internet?  Likewise, more and more employers are listing their job openings on industry-specific websites rather than paying for expensive newspaper ads.  Economists have a word for the constant ebb and flow of changing consumer demand and business adaptation; it’s called creative destruction.

Unfortunately for newspaper executives, their stockholders and thir employees, bankruptcy and consolidation will continue in the publishing industry.  There won’t be any government TARP money for the newspapers.  As their stock prices fall and values of newspaper publishing firms decline, new investors will eventually be able to buy these firms for pennies on the dollar.  Who knows, the new owners, with little debt and a revised business model, may be able to make the newspaper business profitable again.