New Media Investment Group is issuing another $100 million or so in stock to raise more capital so it can buy (and then strip down) some more newspaper properties.
Here are the issues potential shareholders should consider:
- New Media claims to be the “trusted news source” in its markets, which range mostly from small to mid-sized. But massive newsroom staffing cuts have left these operations with skeleton staffs. Consumers have noticed. Print circulation is declining. Without significant reinvestment in its core news products, New Media operations will continue losing market share.
- New Media predicts stable subscription income from its properties. But the company has created “stability” by charging more for the ever-shrinking number of newspapers it prints. That strategy has accelerated the print circulation decline and endangered this revenue stream.
- Digital paywalls can generate new revenue, but at the risk of reducing market penetration. This could undermine the digital sales strategy.
- New Media touts its digital sales growth. But much of the digital sales remains tied to print advertising, which is on the decline. Advertising salespeople are under increasing pressure to build digital sales and push Propel Marketing at the expense of print advertising — even though print still delivers much higher margins.
- New Media is taking a harder line in labor negotiations this year with Newspaper Guild locals. This aggression comes after years of job slashing, wage freezing and benefits erosion. As a result, the Guild is waging public campaigns against New Media properties in key markets like Providence, Springfield and Rockford. Those campaigns will intensify during the weeks ahead, getting the attention of readers and advertisers. If this labor battles persist, they could hurt business.
New Media addressed some of these potential concerns in its company prospectus, as part of the “Risks Related to Our Business” section of disclosure.
Here are some excerpts as presented in New Media Investment Group prospectus. The United Media Guild has inserted its own comments in italics:
Risks Related to Our Business
We compete with a large number of companies in the local media industry; if we are unable to compete effectively, our advertising and circulation revenues may decline.
Our business is concentrated in newspapers and other print publications located primarily in small and midsize markets in the United States. Our revenues primarily consist of advertising and paid circulation. Competition for advertising revenues and paid circulation comes from direct mail, directories, radio, television, outdoor advertising, other newspaper publications, the internet and other media. For example, as the use of the internet and mobile devices has increased, we have lost some classified advertising and subscribers to online advertising businesses and our free internet sites that contain abbreviated versions of our publications. Competition for advertising revenues is based largely upon advertiser results, advertising rates, readership, demographics and circulation levels. Competition for circulation is based largely upon the content of the publication and its price and editorial quality. Our local and regional competitors vary from market to market and many of our competitors for advertising revenues are larger and have greater financial and distribution resources than us. We may incur increased costs competing for advertising expenditures and paid circulation. We may also experience a decline of circulation or print advertising revenue due to alternative media, such as the internet. If we are not able to compete effectively for advertising expenditures and paid circulation, our revenues may decline.
UMG’s take: By slashing the newsroom workforces at all of its operations, New Media has diminished the quality of its products and risked the loss of readership and advertising support. State Journal-Register reporters in Springfield learned this first hand while manning an informational booth at the Illinois State Fair. They spoke to hundreds of dissatisfied readers of New Media newspapers all over the state.
We could be adversely affected by declining circulation.
Overall daily newspaper circulation, including national and urban newspapers, has declined in recent years. For the year ended December 30, 2012, our Predecessor’s circulation revenue decreased by $0.3 million, or 0.2%, as compared to the year ended January 1, 2012. There can be no assurance that our circulation revenue will not decline again in the future. Our Predecessor was able to maintain its annual circulation revenue from existing operations in recent years through, among other things, increases in per copy prices. However, there can be no assurance that we will be able to continue to increase prices to offset any declines in circulation. Further declines in circulation could impair our ability to maintain or increase our advertising prices, cause purchasers of advertising in our publications to reduce or discontinue those purchases and discourage potential new advertising customers, all of which could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to pay dividends.
The increasing popularity of digital media could also adversely affect circulation of our newspapers, which may decrease circulation revenue and cause more marked declines in print advertising. If we are not successful in offsetting such declines in revenues from our print products, our business, financial condition and prospects will be adversely affected.
UMG’s take: GateHouse Media kept driving up the price of its newspapers while giving readers less and less content. That pattern has continued for those papers and others under the New Media Investment Group umbrella. Since the company is asking the Guild to agree to “frequency of publication” freedom in its collective bargaining agreement, you can expect more of these properties to quit publishing on a daily basis.
A shortage of skilled or experienced employees in the media industry, or our inability to retain such employees, could pose a risk to achieving improved productivity and reducing costs, which could adversely affect our profitability.
Production and distribution of our various publications requires skilled and experienced employees. A shortage of such employees, or our inability to retain such employees, could have an adverse impact on our productivity and costs, our ability to expand, develop and distribute new products and our entry into new markets. The cost of retaining or hiring such employees could exceed our expectations which could adversely affect our results of operations.
UMG’s take: There is no shortage of experienced employees in the media industry. But there IS a shortage of experienced employees willing to work for less at New Media properties. The company hasn’t given regular raises in years and it refuses to offer them in bargaining for new collective bargaining agreements. So the company will continue churning reporters, salespeople, editors and even publishers at its properties. Remember, New Media does not run a widget factory. It is selling content produced by reporters, photographers and editors. It is selling market penetration and advertising opportunity. The constant employee churn lessens the appeal of these products to readers and advertisers.
A number of our employees are unionized, and our business and results of operations could be adversely affected if current or additional labor negotiations or contracts were to further restrict our ability to maximize the efficiency of our operations.
As of June 29, 2014, we employed approximately 5,552 employees, of whom approximately 702 (or approximately 12.6%) were represented by 28 unions. 87% of the unionized employees are in three states: Massachusetts, Illinois and Ohio and represent 24%, 34% and 29% of all our union employees, respectively. Most of our unionized employees work under collective bargaining agreements that expire in 2014.
Although our newspapers have not experienced a union strike in the recent past nor do we anticipate a union strike to occur, we cannot preclude the possibility that a strike may occur at one or more of our newspapers at some point in the future. We believe that, in the event of a newspaper strike, we would be able to continue to publish and deliver to subscribers, which is critical to retaining advertising and circulation revenues, although there can be no assurance of this.
Our potential inability to successfully execute cost control measures could result in greater than expected total operating costs.
We and our Predecessor have implemented general cost control measures, and we expect to continue such cost control efforts in the future. If we do not achieve expected savings as a result of such measures or if our operating costs increase as a result of our growth strategy, our total operating costs may be greater than expected. In addition, reductions in staff and employee benefits could affect our ability to attract and retain key employees.
UMG’s take: The company pays only lip service to employee retention. When a top New Media executive stands up in a newsroom and says “we must find ways other than raises to reward our stars,” it is obvious the company isn’t serious about retaining “key employees.” This stance encouraged two of the largest New Media properties to unionize in recent years. This stance is forcing the unionized workforces to take their case to the public — which is quite receptive to their message. Organized labor members, concern public officials and dissatisfied readers are signing support cards every day for our members. In Springfield, we are also exploring a radio campaign to promote this pro-journalism message.
We may not realize all of the anticipated benefits of the synergies between our recent or potential future acquisitions, which could adversely affect our business, financial condition and results of operations.
Our ability to realize the anticipated benefits of the synergies between our recent acquisitions, including our acquisition of The Providence Journal, or potential future acquisitions of assets or companies will depend, in part, on our ability to scale up to appropriately integrate the businesses of such acquired companies with our business. The process of acquiring assets or companies may disrupt our business and may not result in the full benefits expected.
Additionally, we may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities and consummating acquisitions on acceptable terms. Furthermore, suitable acquisition opportunities may not even be made available or known to us. In addition, valuations of potential acquisitions may rise materially, making it economically unfeasible to complete identified acquisitions. The risks associated with integrating the operations of recent and potential future acquisitions include, among others:
Not retaining key employees, vendors, service providers, readers and customers of the acquired businesses.
UMG’s take: New Media’s first big move in Providence was to lay off the popular columnist along with other key journalists. This has led to a public campaign to highlight the decimation of the Journal product. It’s not a question of if this product erosion will diminish revenue, but how quickly.
Bottom line: The folks running New Media built one big house of cards, GateHouse Media, that collapsed under a billion dollars of debt. Now they are at it again. They are buying properties at better prices this time around, but are taking on new debt to do so. They are stripping down these properties. This excessive cost-cutting will the help New Media to buy more properties and pay dividends for a while, but product erosion in an increasingly competitive media marketplace could have disastrous long-term results.