Pulitzer's Owner Takes Prize for Frothy Numbers: Jonathan Weil

Jan. 9 (Bloomberg) -- The name Pulitzer, as in the Pulitzer Prize, long has stood for everything that is right with American newspapers. Nowadays, it also symbolizes all that's wrong with their balance sheets.

In June 2005, Lee Enterprises Inc. paid $1.46 billion in cash to buy Pulitzer Inc., the newspaper chain founded by journalism legend Joseph Pulitzer. For Lee shareholders, it's been one of the worst deals in the industry's history.

Lee's stock market value today is a mere $515 million, after a 63 percent decline during the past year in the Davenport, Iowa-based publisher's shares. Yet judging by its latest balance sheet, you would think the value of the papers Lee bought had been holding up just fine.

The publisher of the St. Louis Post-Dispatch and 54 other daily papers showed a book value, or assets minus liabilities, of $1.09 billion as of Sept. 30. That's about twice the company's current market value and included $2.44 billion of so- called goodwill and other intangibles, which represented 75 percent of the company's total assets.

The market's message: Big writedowns are needed. And Lee has lots of company.

From McClatchy Co. and Gannett Co., the publisher of USA Today, to smaller operators such as Gatehouse Media Inc. and Journal Register Co., newspaper stocks have taken a whipping, especially during the last six months. Yet their balance sheets are still glutted with goodwill and other intangible assets, after years of growing through acquisitions. And their asset values look frothy, as readers and advertisers continue shifting away from print toward online venues.

Hard to Dismiss

Under the accounting rules, a plunging stock price isn't the final word on whether a company's intangible assets have become impaired. Companies instead look to their own internal estimates of future cash flows and other yardsticks when assessing the need for writedowns. Still, the greater the gap is between a company's book and market values, the harder it is to dismiss the market's signals.

Consider just one line from Lee's financial statements, called customer and newspaper subscriber lists. Lee valued these assets at $846.9 million. So, in Lee's view, these lists by themselves were more valuable than what the market says the entire company is worth.

At least those would fetch something in a sale. Lee's biggest asset at Sept. 30 was $1.51 billion of goodwill, mostly from the Pulitzer purchase. Unlike customer lists, goodwill can't be sold by itself. It's merely the ledger entry that companies record to reflect the difference between a premium acquisition price and the fair value of the acquired company's net assets. You would have an easier time selling old Post- Dispatches on EBay.

Taking Writedowns

Lee's chief financial officer, Carl Schmidt, declines to say whether any writedowns are coming. The company on Jan. 7 announced a stock buyback plan, saying its shares are undervalued. ``We're required to periodically update our analysis of impairment, and we will do that,'' he says.

McClatchy, the Sacramento, California-based publisher of the Miami Herald and 30 other dailies, in November announced a $1.43 billion writedown of goodwill and other intangibles for the third quarter. Still, that might not be enough. McClatchy now has an $884 million market value, after a 73 percent one- year drop in its stock price. That's less than half its $1.82 billion book value at Sept. 30, which included $2.54 billion of goodwill and $1.07 billion of other intangibles.

Impairment Review

A McClatchy spokeswoman, Elaine Lintecum, says the company is conducting its year-end impairment review and that it's premature to conclude further writedowns are necessary. ``A lot goes into impairment testing, and it isn't just the stock price,'' she says. Lintecum made similar comments for a July 11 column I wrote about McClatchy, four months before it announced the third-quarter writedown.

Even Gannett, the largest U.S. newspaper publisher, looks ripe for a balance-sheet hit. Its market value is $7.9 billion. By comparison, its $8.98 billion book value at Sept. 30 included $10.06 billion of goodwill and $818 million of other intangibles. Tara Connell, a spokeswoman for the McLean, Virginia-based company, says Gannett is evaluating the matter.

Gatehouse, based in Fairport, New York, held its initial public offering in October 2006, touting a strategy of aggressively buying small-town newspapers. Its market value is now $462 million, after a 51 percent one-year decline in its stock price. By contrast, the owner of 101 dailies showed a $731.6 million book value at Sept. 30, including $923.3 million of goodwill and $781.6 million of other intangibles. Gatehouse's chief financial officer, Mark Thompson, declined to comment.

Truth as Virtue

As for Journal Register, its market value is $67 million, after a 74 percent one-year decline in its stock. The Yardley, Pennsylvania-based company's Sept. 30 balance sheet showed a $240.8 million book value, including an eye-popping $726.9 million of goodwill. Journal Register's chief financial officer, Julie Beck, didn't return calls seeking comment.

Joseph Pulitzer, whose will provided for the establishment of the Pulitzer Prizes and the journalism school at Columbia University, was an avid sensationalist. Yet he also extolled the importance of getting facts right. ``Accuracy is to a newspaper what virtue is to a lady,'' he famously observed.

Whatever the future of newspapers may be, the investing public has little faith in the accuracy of these companies' financial statements. That's a sad commentary for an industry whose mission is to keep other institutions honest.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at jweil6@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net