By MARTIN PEERS
If the doomsayers are right, control of New York Times Co. could be up for grabs in the next year or two. So, how should wannabe ink-stained rich guys play this situation?
Unless they are Carlos Slim, not easily. Terms of the Mexican billionaire’s loan to the Times in January gave him a clear edge if there is ever a battle for control. His $250 million loan has to be repaid if control changes. And, on top of his 6.4% stake, he has warrants for a further 10% of the equity.
That, and the Sulzberger family’s control through super-voting shares, suggests potential suitors shouldn’t buy stock, including the 20% Harbinger stake David Geffen has sniffed around.
Then, there is valuation. Profits have evaporated. Assuming a multiple of four times 2009 expected earnings before interest, taxes, depreciation and amortization — healthier media companies trade at 5 to 6 times — suggests an enterprise value below the Times’s $1 billion of debt. That implies the equity is worthless.
A better opportunity: The Times’s 2015 bonds, now trading around 70 cents on the dollar. If the Times’s fortunes improve, the bonds will trade up. If the company instead hits the rocks, bondholders have a seat at the table, alongside the banks and Mr. Slim.
Pressure from near term debt maturities has eased since the head office sale-and-leaseback and the Slim loan. The next crunch point is 2011 when the company has to refinance its revolving credit line, with $220 million drawn as of March 29.
Moody’s estimates free cash flow of $50 million to $60 million this year and next, before any payment to cover the company’s pension deficit next year.
On that basis, and assuming a sale of its interest in a New England sports partnership that includes the Boston Red Sox, it could feasibly pay off the revolver early.
The trajectory of ad revenue is critical. It fell 27% in the first quarter. Times executives expect a similar plunge this quarter while hoping it stabilizes in the second half.
If it doesn’t, the Times’s plans to cut costs by more than $330 million in 2009 mightn’t be enough to generate free cash flow.
Given the secular decline in newspaper advertising, though, the Times will likely need to raise cash to pay down debt and meet pension obligations. Raising equity while the Sulzbergers retain absolute control looks like a nonstarter. Buying out the family may be possible, but a big premium would only be justifiable for a bidder wanting a trophy asset.
Mr. Slim looks best positioned to make the numbers work. Exercising his warrants would pump $100 million into the Times. He could also swap his bonds for equity to reduce debt.
But such an outcome would presumably require the family to give up full control.
