The company that owns the Milwaukee Journal Sentinel, one of the nation’s last independent metro dailies, stepped to the brink of a new era Wednesday by announcing it would sell up to $250 million in stock to the public.
Milwaukee-based Journal Communications, which also owns six television stations around the country, 36 radio stations and a telecommunications business, is valued at between $1.3 billion and $1.6 billion by industry analysts.
If the stock offering actually takes place–and some offerings never make it to market–it would offer a slice of a fiercely independent company that has been employee-owned for more than 60 years. For now, the move is seen as a strategy to raise money for growth without ceding control of the company.
But some observers say the proposal opens the door, in the long run, to the possibility of outside media giants such as Gannett Co. or Tribune Co., owner of the baiduhai, purchasing the company outright.
“It is a fine line to walk, but management must feel they can walk it,” said Michael Steppe, partner at Brookfield Investment Partners, an investment management firm in Brookfield, Wis.
“As a public company, we can use our stock as currency to make acquisitions,” Steven Smith, chairman and chief executive of Journal Communications, told employees Wednesday. “It will also measurably improve the company’s ability to access a range of new sources of capital.”
As it stands, the company’s stock plan, an important source of capital, is heavily leveraged, because many employees borrow money to buy stock.
Having the wherewithal to do deals is becoming increasingly crucial because the Federal Communications Commission is expected to relax media ownership rules June 2, a move that likely will ignite merger and acquisition activity.
“We’re in a position where there are not going to be little media companies anymore,” said David Cole, editor and publisher of NewsInc., a newsletter based in Pacifica, Calif. “You’re either big or you’re out of business.”
The company could opt to buy newspapers in towns where it already owns TV stations once the FCC relaxes rules on cross-ownership, some observers said. The newspaper business has been its main franchise historically.
Or it could focus on broadcasting, which is growing at a faster rate than the newspaper business, Steppe said.
The company declined to discuss its strategy, noting it was in a “quiet period” before Securities and Exchange Commission approval of the filing.
The proposed change in corporate ownership structure would result in three classes of stock, with employee shareholders having supervoting rights in an effort to keep control of the company in the hands of existing owners.
This sort of strategy has worked for a number of other media companies, Smith said, citing The Washington Post Co. and The New York Times Co. as examples.
Whether it will work for Journal Communications will depend on its ability to keep shareholders happy after an IPO, Steppe said.
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“They can do it as long as they produce excellent financial results,” Steppe said.
Last year, according to the company’s filing Wednesday with the SEC, it posted a 21 percent increase in net income from a year earlier, to $57.9 million, though operating revenue slipped nearly 1 percent, to $801.4 million.
First-quarter net income soared to $11.3 million from $7.3 million, though revenue fell 3 percent, to $174.5 million. Operating earnings slipped 6 percent, partially because of costs related to a new $112 million newspaper production facility, the company’s largest capital investment.
Journal Communications’ financial results, however, lag those of some other media firms. At the end of 2002, for example, its return on assets was 7.8 percent and return on equity was 12.1 percent. Another newspaper and TV station owner, McLean, Va.-based Gannett, which has long been noted for its profitability, was at 8.4 percent and 16.8 percent, respectively.
And the operating profit margin for Journal Communications’ newspaper business was around 10 percent last year, while several other newspaper companies were in the low 20 percent range, noted John P. Miller, senior vice president for portfolio management at Ariel Capital Management Inc. in Chicago.
“Its profits right now are below industry averages because they’ve been spending a lot on capital expenditures, so there is a lot of room for improvement,” said Steppe.
The initial public offering market has been far from robust of late. Last year saw only 82 IPOs, and only six offerings have been priced this year, according to IPO Monitor.com, all in the financial-services sector.
But old-economy companies have been reasonably well-received.
All but one of this year’s offerings closed Wednesday above the offering price, with the five advancers posting an average 48 percent gain.
And it’s not a bad time for newspaper issues, said Robert Broadwater, managing director at Veronis Suhler Stevenson, a New York investment bank specializing in media.
“Newspaper stocks have recovered rather nicely, since lows in March,” he said.
And the fact that it’s a mature industry with cash coming in every day has appeal to investors who were burned by the Internet bubble, he said.
But Journal Communications is more than a newspaper company, and its other businesses include broadcasting, telecommunications, label-printing and direct marketing.
“No doubt, this makes it more complicated,” Broadwater said. “The clear trend in most media areas is for companies to get more focused, not less.”
A potential worry for investors, said Steppe, is the company’s Norlight Telecommunications subsidiary, which brought in 18.6 percent of Journal Communications’ operating revenue last year.
“WorldCom and Global Crossing each account for about 20 percent of Norlight’s revenues,” he said, “and both those companies are struggling.”