N.Y. Times falls after analyst downgrades shares (Dinosaur Media DeathWatch)

Shares of New York Times Co. fell Thursday after a Morgan Stanley analyst downgraded the company's stock, a rating cut that came after one of the brokerage's investment funds called on the publisher to reform its corporate governance practices.

Analyst Lisa Monaco cut her rating on New York Times (NYT) to underweight from equal-weight and put a $20 price target on its shares. New York Times shares were off nearly 3% in recent action, at about $23.85.

On Wednesday, Morgan Stanley's (MS) Investment Management fund, which holds 7% of Times' shares, submitted a proposal that among other things, calls for the company to separate the chairman and chief executive jobs now held by Arthur Sulzberger.

In a note Thursday to clients, Monaco said the company was likely to underperform compared with the rest of the industry because its 2007 estimates may be too high, its numbers are likely to lag the rest of its peers, a sale of the company is implausible and the stock is trading at an unwarranted premium.

"[New York Times] has been one of the few newspaper companies to invest heavily in its product and content over the last five years and has been successful at driving traffic to their sites," Monaco said in her note to clients. "However, to-date revenues and profits online have been rather insignificant."

"So, it's hard to see how or what would drive an acceleration in online growth to the levels where it can offset the loss on the print side," Monaco went on to say.

Monaco was unavailable for further comment. In its call for corporate governance changes Wednesday, the Morgan Stanley investment fund also called for the chairman to be an independent director and that its compensation committee be comprised mostly of others not connected to the company.

Related

http://www.sacbee.com/103/v-print/story/73797.html
Private thoughts
New news strategy has risks, too
By Dale Kasler - Bee Staff Writer
Published 12:00 am PST Thursday, November 9, 2006

The stock market has been setting records lately, but some newspaper publishers and other big media companies want no part of Wall Street.

Saddled with sluggish profits and stock prices, facing an uncertain future as they try to compete against the Internet for consumers and advertisers, mainstream media titans such as Tribune Co. and radio giant Clear Channel Communications Inc. may sell to private investors or take themselves private, removing themselves from the ranks of publicly traded corporations. Tribune's efforts gained momentum Wednesday when Los Angeles investors Eli Broad and Ron Burkle reportedly bid for the company.

Feeding the trend: A profound shift in how people get news and entertainment, "the biggest restructuring of the media since television came along in the late '40s," said Stephen Lacy, a media economist at Michigan State University.

Just as TV scrambled everything else -- from movie production to newspaper publishing and beyond -- the Internet is forcing the mainstream media to create entirely new business models, Lacy said. Going private, the theory goes, insulates them from Wall Street's quarter-to-quarter profit pressure and gives them time to sort out their strategies.

But it's no cure-all. The private-equity firms and investor groups swirling around Tribune and other public companies have revenue expectations, too, and may lose patience if profits dwindle. Newspapers in some cities, including Philadelphia, are being purchased by high-minded local investors, but difficult business conditions are beginning to overwhelm civic virtue.

Still, there is an obvious allure to taking a troubled company private.

"You're seeing traditional media in a place where they have to modify their business model," said Chris Watters, an analyst at Ariel Capital Management, a major shareholder in such media companies as Tribune and The McClatchy Co. of Sacramento. "Sometimes that transition can be kind of messy. It would be a pretty rough process to do that as a public company."

One company that won't go private any time soon is McClatchy. The Bee's owner borrowed about $3 billion to buy Knight Ridder Inc. earlier this year; borrowing billions more to buy out its shareholders isn't a realistic option, said Chairman and Chief Executive Gary Pruitt.

Pruitt said going private could happen some day. "In the future, if we felt that (it was) the best way to preserve the quality and independence of the company ... we certainly would consider that option," he said.

In the meantime, Pruitt said, public ownership has been good for McClatchy. Among other things, the company has been able to use its stock as currency to make acquisitions; stock represented about one-third of the $4 billion price McClatchy paid to buy Knight Ridder.

What's more, McClatchy has a two-tier stock structure that puts the McClatchy family firmly in control of the company's fortunes and provides additional buffer against Wall Street.

Knight Ridder had no such defense, and neither does Tribune.

The Chicago-based conglomerate has struggled in recent years and agreed to put itself up for sale following a public feud with its second-largest shareholder, the Chandler family, former owners of the Los Angeles Times. The company's holdings include the Times, the Chicago Tribune, the Chicago Cubs and 25 TV stations, including the Fox affiliate in Sacramento.

The only bidders in the first round were private-equity firms, outfits known for buying public companies, fixing their problems and then reselling them. When those bids came in lower than Tribune expected, Tribune quietly sent word that it would entertain offers for parts of the company. But in the latest twist, the Times reported on its Web site Wednesday that Broad and Burkle, two prominent Los Angeles businessmen, had submitted a bid for the entire company. Burkle was an unsuccessful bidder for a dozen papers spun off by McClatchy when it took over Knight Ridder.

In any event, whether in pieces or as one big chunk, it's likely Tribune will wind up leaving Wall Street.

The sale of Tribune is the latest centerpiece in the debate over the future of newspapers. Adding to the drama is turmoil at the Times, where the publisher and editor have been ousted after refusing to agree to budget cuts ordered from Chicago.

Other media companies may join Tribune in going private. Mega-broadcaster Clear Channel, owner of KFBK (1530 AM) and three other Sacramento radio stations, has received one takeover bid from a private-equity firm and is expected to receive others. The family behind Cablevision Systems Corp., a New York-based cable TV operator, has offered to buy out its public shareholders.

The Internet is at the root of much of this. While these big companies have their own Web operations, they aren't growing quickly enough to make up for the slowdown in their core businesses. Meanwhile, Wall Street won't wait for them to figure out their future.

Newspapers are a particularly vivid example of the squeeze under way. They're still among the most profitable businesses on Wall Street -- margins are about 18 percent this year, nearly twice as much as the average Fortune 500 company, according to independent analyst John Morton.

Just a couple of years ago, though, the margins were well over 20 percent. "It's not that newspapers are terrible performers, but they do pretty well," said Michigan State's Lacy. "(But) they don't meet expectations."

Going private doesn't guarantee success. Private-equity firms may have longer-term perspectives than Wall Street, but aren't softies, either.

Take the 12 papers McClatchy inherited from Knight Ridder but immediately spun off because, McClatchy said, their profits were too low and their markets were growing too slowly. All 12 wound up in private hands, and some of the new owners have wasted little time pruning costs.

Canadian publisher Black Press Ltd. laid off one-fourth of the newsroom at the Akron (Ohio) Beacon Journal. MediaNews Group Inc., in contract negotiations with the San Jose Mercury News, has threatened layoffs and proposed cutting pay by 30 percent for new reporters.

"Private ownership vs. public may not make that much of a difference in some markets if the advertising's disappearing," Lacy said. "If you're private, you can choose to be less greedy, but you do have to recognize that if you don't turn a profit, you won't survive."

In some cases, the pressures of private ownership can be at least as great, if not greater, than Wall Street, especially if the new owners have borrowed heavily to finance their purchases.

That's the case in Philadelphia, where prominent local investors purchased the Inquirer and Daily News from McClatchy for $562 million.

The investor group went in with high hopes. "The next great era of Philadelphia journalism begins today," lead investor Brian Tierney declared in May. "We want to grow these publications, not try to manage the decline."

But in a recent memo to employees, he said layoffs are "unavoidable" and business conditions have slipped to the point that the new owners will have trouble "meeting our bank obligations" if costs aren't cut.

While some have called his memo a ploy to bring labor unions into line, others said it illustrates the swift decline in the newspaper advertising climate -- and the risks of going private.

"You have a much bigger mortgage payment and you absolutely have to make your numbers," said Alan D. Mutter, a former newspaper editor who is managing partner of a San Francisco investment firm.

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