A rumor floated into my email inbox a few weeks ago, reporting that a group of investors was negotiating to buy the News & Observer. It was wishful thinking, as far as I could tell, probably the metastatic offspring of the common refrain that often pops up whenever local readers discuss the N&O’s woes: Why doesn’t somebody buy the paper and free it from McClatchy’s troubled clutches?

It is my sad duty to report that it won’t happen. Investors will take custody of the N&O only when they pry it from McClatchy’s cold, dead fingers.

There are two reasons for this. First, McClatchy — for all its financial woes — is under no immediate pressure to raise cash. The single most important number to McClatchy right now is its leverage (loosely defined as the ratio between the company’s debt and its earnings). And to call it important isn’t just my analysis, by the way. McClatchy itself, in its annual report with the Securities and Exchange Commission earlier this year, said that staying within bank-imposed leverage limits “is critical to the Company’s operations.”

Everything McClatchy does these days is in service to that ratio, which calls for debt not to exceed seven times earnings. In its latest SEC filing, McClatchy reported that its debt was just a little more than five times earnings — well below its limit. In short, McClatchy won’t sell the N&O because it doesn’t have to. The company has breathing room.

But what McClatchy also has is $3 billion worth of obligations, two-thirds of which is long-term debt. (The remainder is pension obligations, workers comp, etc.) There’s a relatively small debt payment due in April, but starting in 2011 the big bills start rolling in. Unless McClatchy sees its revenue turn around dramatically in the next two years, it’ll have to consider selling assets to raise cash — assets like the N&O.

Before I go further, though, consider this passage from a report in last week’s Wall Street Journal on the sale of the San Diego Union-Tribune, owned by Copley Press:

The Union-Tribune is the country’s 23rd-largest newspaper, with weekday circulation of nearly 270,000.

The deal price wasn’t disclosed, but a person familiar with the matter said it was less than $50 million, a price largely driven by the Copley Press real estate, which includes the complex housing the Union-Tribune and another facility. The value of the assets — even amid a downtrodden real-estate market — gives the buyers some cushion against the struggling newspaper, according to people familiar with the matter.

A newspaper significantly larger than the N&O sold for less than $50 million, mostly on the basis of its real estate holdings. The N&O’s downtown headquarters has an assessed value of $11.6 million, according to tax records. It also owns a parking lot downtown assessed at $417,000 and a distribution center in Garner assessed at $6.6 million. Total those up, and assume that the assessed values reflect an actual market value (they may actually be higher than market value, considering how far real estate has fallen), and it adds up to less than $19 million. Maybe the N&O has other small holdings elsewhere, but this is surely the bulk of its real estate.

Stay with me, there’s a little more math. If McClatchy apportioned its long-term debt equally among its 30 daily papers, each paper would be responsible for nearly $67 million of debt. But that’s not how it works. McClatchy instead expects its bigger papers to do the heavy lifting on paying down the debt. My rough guess is that the N&O, being McClatchy’s sixth-largest paper, is on the hook for at least $100 million (and probably much more) of the debt.

In other words, that’s how much McClatchy would need, at a minimum, to take away from the sale of the N&O. What would a buyer get for $100 million? Nineteen million dollars worth of real estate, and a company whose main business may go the way of the eight-track tape player. You think there are any such buyers out there?

That’s why McClatchy can’t sell the N&O. But someday, the bank might.

This entry was posted on Tuesday, March 24th, 2009 at 1:01 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.