Slower Gross Domestic Product growth, stock-market declines and rising corporate debt portend the first cold wind in the burgeoning U.S. economy since the 1995 chill. But don’t shelve those expansion or acquisition plans yet, analysts say.
Several signs hint at a possible cooldown in 2001. A barrel of oil that cost $10 in late 1999 was $34 in the fall, sparking rising fuel prices; consumers and companies are increasing their borrowing, sometimes to unwise levels, as tracked by banks’ quarterly losses from bad loans; and the stock market has declined, led by Nasdaq’s 50 percent loss in value between March and December. Analysts attribute the drop mostly to under-performing technology stocks and tanking dot-coms, aided by the post-presidential election skirmish that sent Wall Street into spasms of uncertainty. The annual rate of GDP growth, estimated at 7.4 percent for 2000, is expected to fall to 5.7 percent for 2001, the slowest pace since 1995.
Although the economy is not accelerating as fast as in recent years, newspaper executives need not panic. Unemployment still holds at a 30-year low of approximately 4 percent. Inflation for 2000, spiked by climbing energy costs, ran about one percentage point higher than 1999, but core inflation, excluding volatile food and energy prices, rose only 0.2 percent. Money watchers point to the Federal Reserve Board’s Nov. 15 decision to leave the key overnight federal funds bank-lending rate at 6.5 percent and its discount rate on loans to banks from the Federal Reserve system at 6 percent only as indicators that the economy is cooling. The Fed, however, remains wary of inflation.
Commenting on its decision to hold the course, a statement issued by the Federal Reserve monetary panel wrote, “Softening in business and household demand, and tightening conditions in financial markets over recent months suggest that the economy could expand for a time at a pace below the productivity-enhanced rate of growth....Nonetheless, to date, the easing of demand pressures has not been sufficient to warrant a change.”
THE
COST OF CASH
The Fed last raised rates by one-half percentage point in May. Higher interest
rates negatively affect a company’s bottom line by increasing borrowing
costs. Loans typically begin at the prime rate, which was 9.5 percent in November,
plus a half point. In addition, more than 40 percent of domestic banks have
tightened standards on loans to large and middle-market businesses, according
to the Fed’s survey of senior bank-loan officers.
Bank
lending to commercial and industrial companies not only stopped growing but
actually fell 1 percent in the third quarter compared with the same quarter
in 1999. “This represents a sharp squeeze on corporations, and it happened
much faster than we expected,” says Ian Sheperdson, chief U.S. economist
at High Frequency Economics Ltd. in Valhalla, N.Y. Cash-poor businesses will
likely take the biggest hit, he says.
However, as the proverb advises, “Money begets money.” And unlike Wall Street, which yawns at the newspaper industry’s stability, slow growth and long-term asset value, bankers rank publishers among the best of the begetters.
Even with the cooling economy, operating cash flow for publicly traded papers rose 5.8 percent in third-quarter 2000. Bankers watch that category closely because it tells them how much cash is available to pay on the principal and interest, says John Morton, newspaper analyst and president of Morton Research Inc. in Silver Spring, Md.
“Newspapers typically have a lot more cash on hand than other businesses, so they tend to get more favorable [loan] rates. [Media companies] aren’t heavily leveraged. They pay down debt quickly. After all, money rolls in every month,” he says.
For the biggest acquisitions, the industry resorts to bank debt or selling bonds on the long-term market. Bankers tend to base media-company interest rates on the London Interbank Offered Rates, currently at 6.7 percent. But while most loans would begin at three points above the LIBOR, even in times of economic transition, lending institutions tend to offer better rates to newspaper companies than to businesses that produce a smaller cash flow. “Most newspapers don’t operate in a prime-plus world. The [capitalization] process is much more sophisticated,” says Miles E. Groves, chief economist with The Barry Group in Bethesda, Md.
According to Gannett Co.’s annual report, on Dec. 26, 1999, rates on unsecured promissory notes due between Dec. 27, 1999, and Jan 31, 2000, varied from 4.8 percent to 5.2 percent. Tribune Co.’s annual report listed promissory notes with a weighted average interest of 6.6 percent, and medium-term notes, due between 2000 and 2008, with weighted average interest of 6.2 percent.
A company the size and stature of The New York Times Co., for example, will raise bonds or issue its own securities. Many prefer private placement to avoid selling stock and diluting ownership.
Media companies rely on more than one single method to finance large acquisitions, says Robert G. Picard, a former California State University communications professor who manages a media-research center in Turku, Finland. Aside from financing debt through banks or other capital sources, common trends include issuing new shares and selling shares that the company had withheld previously.
Larger corporations also use pre-existing, large revolving-credit agreements with lenders that they can draw on for quick acquisition financing. “They tend to do so for a short period of time and then move to another less-expensive form of financing after the acquisition dust settles,” he says. And some acquisitions come through mergers that typically involve stock swaps rather than cash.
Only a few media giants raise capital by floating bonds, and rates vary between 8 and 12 percent depending upon the size, assets and existing debts of the company. Most corporate bonds provide fixed interest rates until maturity. The price of bonds themselves varies with investor confidence.
INNOVATION
WATCH
In recent years,
a number of newspaper corporations have planned initial public offerings to
spin off their new-media arms and raise cash. This followed the market trend
of raising capital by separating the new media unit from the parent firm, says
Picard. And while tech stock prices were soaring, employees enjoyed being rewarded
with ownership shares. With tech stocks sliding, however, those plans appear
to be on hold.
A few newspaper companies are trading advertising space for a share of new-media companies, thereby making acquisitions without taking out loans or surrendering stock. Newspaper publisher Hollinger International Inc. of Toronto increased its investment in Bidhit.com, Inc., a Seattle-based Internet auction and e-commerce company, to 12.4 percent, or $3.4 million, in April. The transaction consisted of $300,000 in cash and $2.1 million in advertising in Hollinger’s publications. Bidhit will use part of the cash investment to develop a pilot marketing project with Hollinger’s Chicago Sun-Times.
In November, Gannett Co. became an equity investor in Space.com Inc., a space-related Internet site, through an undisclosed cash investment along with “substantial marketing and promotional support of its media assets.” These include USA Today, regional newspapers, broadcast stations and Internet properties, in exchange for an interest in Space.com.
Such cutting-edge transactions are not unusual between cash-poor Internet companies and magazines, observes Groves. “A company that doesn’t have much cash but needs exposure will often get a heavily discounted rate plus options or stock, but newspapers are still pretty conservative investors that don’t want to gamble on unorthodox ventures.”
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