Reality bites. McClatchy Chief Executive Gary Pruitt's decision to quit as a trustee of the McClatchy family trusts is an ominous sign for shareholders in the newspaper publisher. While it is good corporate governance for the CEO to distance himself from the company's controlling shareholder, it could herald a painful deal for McClatchy's long-suffering shareholders.That realization appeared to spread Tuesday, as McClatchy stock, which had jumped on chatter that the company could be preparing to go private, fell. A refinancing deal is more likely, which would dilute or even wipe out the remaining equity value. McClatchy's market value is about $300 million. This might appear to be a radical solution for McClatchy, which is still generating cash. And its liquidity should improve somewhat soon if it suspends its $59 million annual dividend payout.
The problem is the worsening newspaper fundamentals. In the six months to June, McClatchy generated $173 million of earnings before interest, taxes, depreciation and amortization, easily covering $82 million in interest costs. But that Ebitda was down from $280 million a year earlier, as revenue plunged 15%.
At that rate of decline, it won't be long before McClatchy can't cover its interest bill. Indeed, the cost of insuring against default by McClatchy has soared this year, to about $1.5 million from about $525,000 per $10 million of debt, according to data provider Markit.
And industry conditions aren't getting better. McClatchy's July ad revenue was down 19%. The best solution for McClatchy is to figure out a way to convert some of its $2.1 billion debt to equity. Shareholders may very well be the walking dead.
By: Martin Peers
Wall Street Journal; September 10, 2008
