Conrad Black’s Hollinger International Inc. is looking to sell some or all of its newspapers, but the embattled publisher’s far-flung morsels may not prove all that tasty to potential buyers, particularly if offered as a package deal.
For starters, Hollinger’s two biggest newspapers, the Chicago Sun-Times and The Daily Telegraph in London, are up against big rivals in highly competitive markets–a turnoff for many media companies.
And tight-fisted Hollinger has done a good job of squeezing costs out of its properties, which limits profit-growth potential for new owners.
Hollinger’s properties also are widely dispersed–extending from western Canada through the Chicago area to London and Jerusalem–eliminating the efficiency possibilities that exist in geographic clusters.
“It’s unlikely any major U.S. newspaper companies are going to be interested in anything Hollinger owns,” said John Morton, president of Morton Research Inc., a media research firm in Silver Spring, Md.
Hollinger put itself on the block Monday after an embarrassing announcement: Black and three chief lieutenants had pocketed more than $16.5 million in unauthorized payments.
Black and David Radler, the publisher of the Sun-Times, acknowledged taking about $7.2 million each in “non-compete” payments after selling a group of community newspapers several years ago. The payments were not disclosed to Hollinger shareholders nor were they approved by the company’s directors, the company acknowledged.
The secret payments to the four executives were in addition to $15.6 million of other non-compete payments made to another firm controlled by Black that had been disclosed in Hollinger’s regulatory filings but that also had not been approved by the Hollinger board.
Radler resigned Monday, and Black is to retire Friday as Hollinger’s chief executive, though he will remain Hollinger’s non-executive chairman.
In a statement Monday, Black said he would devote his attention “to achieving a successful outcome for all Hollinger shareholders. The present structure of the group clearly must be renovated.”
Hollinger said it has retained investment banking firm Lazard LLC to “review and evaluate its strategic alternatives, including the possible sale of the company, a sale of one or more of its major properties or other possible transactions.”
Interest in U.S. limited
Some U.S. newspaper owners already are taking a pass.
William Dean Singleton, chief executive of the Denver-based MediaNews Group, said he’s not interested.
“There are some suburban papers there that are probably real good. But really, they’re centered around the Sun-Times, which is a No. 2 tabloid,” he said. “That’s just not our type of operation.”
Tribune Co., the owner of the baiduhai, has unsuccessfully bid for some of the suburban papers now in Hollinger’s stable. But it also is likely to sit on the sidelines until media ownership rules are clarified, a company source said Monday.
Despite Hollinger’s drawbacks, there may be greater interest from some foreign media companies, or private equity companies, at least for parts of the company, observers say.
Even so, it won’t be an easy sell.
If federal media ownership restrictions are dropped, Rupert Murdoch, whose Australia-based News Corp. owned the Sun-Times from 1984 to 1986, may be tempted to revisit that experience. Murdoch’s Fox Television division owns WFLD-Ch. 32 and WPWR-Ch. 50 in Chicago.
“There are some cross-ownership and cross-promotional opportunities … and they know how to operate tabloid newspapers. The Sun-Times is not that different from the New York Post,” said Bob Goldsborough, research analyst with Ariel Capital Management in Chicago. “They both have a lot of personalities, and they’ve been successful promoting them.”
Until recently, such a deal would have been prohibited under Federal Communications Commission rules banning cross-ownership of newspapers and television stations in a single market. Earlier this year, the FCC lifted this ban, and other restrictions on media ownership. But the changes remain on hold pending legal and congressional challenges.
Some private equity firms may be attracted as well, says one investment banker.
Even though newspapers are a mature segment of the industry, they generate a lot of cash and usually don’t require much capital investment.
“Newspapers don’t look bad these days. To financial buyers, low growth isn’t bad as long as the pricing reflects it,” the banker said. “A financial buyer only cares if he can run them all and pay down debt. Later, he can sell them in pieces.”
A private equity firm is more likely than a public firm to be able to structure a deal acceptable to Black, the investment banker said. Black will almost certainly want to retain an equity interest, even if he has no operating control, something a private firm could work out.
Another scenario has Hollinger’s Radler joining with institutional backers to purchase the Sun-Times and the company’s other Chicago-area papers.
Black’s longtime business partner, Radler remains president of Horizon Publications Inc., a newspaper company of some 30 media properties closely held by the two men.
“Radler knows those assets, and he’s someone who would not have trouble finding backing,” said an industry observer.
Still, his actions will face intense scrutiny from shareholders and regulators.
Group may be sold as unit
Observers think Black will prefer to sell the Chicago group as one entity, including the Sun-Times and six other properties, among them the Post-Tribune in northwest Indiana, the Daily Southtown, the Pioneer Press community newspapers and a ring of suburban dailies that includes the Herald News in Joliet and the Naperville Sun.
Estimates on the value of the group vary widely. Morton guessed it might fetch $350 million to $500 million, while another analyst thought it could be closer to $1 billion, reflecting 12 to 14 times projected earnings.
But Jan Loeb, media analyst at Jeffries & Co., estimated the Chicago group, together with The Daily Telegraph, could bring just over $2 billion.
The Chicago group had an operating income margin of 11.4 percent for the first half of this year, the best among Hollinger’s holdings, but just over half the industry average.
“Margins in Chicago are well below industry averages, but considering it’s a second newspaper, I consider them remarkable,” said Morton. “There’s not much upside potential there.”
He added: “They achieved this by buying more than 100 titles in the suburbs and marrying them into one much larger operation.”
And by cutting costs.
“It’s been tight over here. We’re stretched thin,” said Bob Mutter, co-chairman of the Sun-Times unit of the Chicago Newspaper Guild. The Guild represents 185 reporters and editors, down from 255 in 1994, when Hollinger bought the paper.
In its head-on battle with the Tribune, the Sun-Times takes about 40 percent of the advertising pie. The two papers together capture the majority of newspaper advertising in the Chicago market, estimated to total $1 billion annually, industry sources said.
And the Sun-Times remains an effective competitor, media buyers say.
“We have found them very aggressive on pricing and very flexible in how they’ll look at things,” said Paula Hambrick, president of Hambrick & Associates in Orland Park. “I don’t think you can ignore them–they have such good coverage of the South Side and the city itself.”
Still, newspaper companies are loath to enter highly competitive markets.
“I can’t imagine a major U.S. publisher wanting to take it on,” Morton said.
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NEWSPAPERS
Chicago newspaper group
2002 operating profit: $35.7 million
CHICAGO SUN-TIMES
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Circulation (Monday-Friday): 481,798
It is the flagship paper for Hollinger’s Chicago Group, which consists of more than 100 publications in the Chicago area and northwest Indiana. The Sun-Times has strong readership in the city, and it recently opened a $115 million printing facility.
DAILY SOUTHTOWN
Circulation (Monday-Friday): 48,047
Hollinger purchased the newspaper, formerly known as the Southtown Economist, in December 1994.
OTHER COMMUNITY PUBLICATIONS
The Chicago group also includes:
– Post-Tribune (northwest Indiana)
– Suburban Chicago Newspapers (with publications in Aurora, Elgin, Joliet, Waukegan, Naperville and elsewhere)
– Pioneer Press newspapers
– Star newspapers (south and southwest suburban Chicago)
Community group
2002 operating profit: $48.1 million
JERUSALEM POST
Circulation (for all Jerusalem Post-related publications): More than 110,000
The English-language newspaper is widely read in the Middle East. A French edition also is published.
U.K. newspaper group
2002 operating loss: $2.1 million
THE DAILY TELEGRAPH
Daily circulation: 926,050*
The newspaper targets middle- and upper-income readers; its main U.K. competitor is The Times. The group also includes The Spectator.
*Not including Sunday.
Canadian newspaper group
2002 operating loss: $5.2 million
It owns more than 10 newspapers in Canada.
Sources: Hollinger International, Securities and Exchange Commission filings,
Audit Bureau of Circulations, Chicago newspaper group publications.
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Hollinger changes executive lineup
DIRECTORS WHO LOST POSTS
CONRAD BLACK
Will retire as CEO effective Friday
– Chairman of the board of directors
– CEO and director of Hollinger International Inc. and Hollinger Inc.
– Chairman and director of Telegraph Group Ltd.
– A director of the Jerusalem Post and the Spectator of London
(Remains as non-executive chairman of Hollinger International, chairman of Telegraph Group, member of the executive committee. He also will retain voting control of Hollinger Inc.)
DAVID RADLER
Resignation effective immediately
– President, chief operating officer, deputy chairman, director of Hollinger International
– Publisher of the Chicago Sun-Times
– A director of the Telegraph of London and Jerusalem Post
– Member of the board of directors
MARK KIPNIS
Resignation effective immediately
– Vice president, corporate counsel and secretary of Hollinger International
PETER ATKINSON
Resigned from the board of directors
(Remains as executive vice president, general counsel, director of Hollinger International)
J.A. BOULTBEE
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Fired by executive committee
(Remains as executive vice president of Hollinger International)
DIRECTORS WHO GAINED POSTS
GORDON PARIS
Interim president and CEO (to take effect upon Black’s retirement)
DANIEL COLSON
Named chief operating officer of Hollinger International
RAYMOND SEITZ
Chairman of the executive committee of the board of directors
JAMES THOMPSON
Elected to the executive committee
RICHARD BURT
Elected to the executive committee
GRAHAM SAVAGE
Elected to the executive committee and audit committee
Source: Hollinger International Inc.