Case Blog

As I indicated in California Dreaming, this recession is going to be deeper than we anticipated just a few short months ago. For the media industry, the advertising slowdown will not spare any categories, as marketers move quickly to cut their variable expenses.

Several years ago before the newspaper industry began its steep decline, Bruce S. Sherman of Private Capital Management (PCM) built up significant positions in many major newspaper companies, including Knight-Ridder. As he saw the storm clouds forming for classified ads, a very profitable category for the newspaper industry, and started to realize that Craigslist’s free classified model would be difficult, if not impossible, to compete with, he pushed Knight-Ridder into play. It eventually was acquired by the family controlled McClatchy Company (MNI), which established two classes of stock, with the voting rights residing in the Class B shares controlled by the family. At the time, their publicly traded A shares were over $50.00 per share and their CEO, Gary Pruitt, got some glowing reviews. He quickly moved to sell off the larger papers, such as the San Jose Mercury News and the Philadelphia Inquirer, where the unions, particularly the Newspaper Guild, were seen as strong. Today, McClatchey shares trade below $3 a share and Sherman’s PCM fund is no longer a major shareholder in the newspaper industry.

This past week, The New York Times Company (NYT), which without a doubt produces the highest quality reporting of any national newspaper in the country, reported that their 3rd quarter income declined by 51%. Their revenue for the quarter declined 9% to $687M (WSJ, October 24, 2008). Based on the anticipated accelerated advertising slowdown, Standard & Poor’s downgraded the company’s credit rating to junk status.  This could take a very significant toll on the controlling Ochs-Sulzberger family. In spite of declining fortunes, they have been able to continue annual dividends that pay the family members approximately $25M annually.  The company’s CFO, James Follo, felt compelled to announce that they would review the dividend policy before year-end.  Like McClatchey, they will also most likely have to take a further write-down on their Boston assets, in particular the Globe. Their shares are trading near $10, which is a 52-week low.  The New York Times has a particularly able online leader in Martin Nisenholtz and recently brought in the very talented Cella Irvine to run About.com.  I had the pleasure, many years ago, to work with Cella at Harcourt Brace Jovanovich.  Even with significant online assets, they reported an overall decline of 16% for advertising revenues, with New England leading the decline at 19.4% (WSJ Friday, October 24th, 2008).  Has any one heard Jack Welch making a case to buy the Globe recently?

Several years ago before this decline became an avalanche and the credit markets dried up, private equity firms and hedge funds would have been lining up to compete for the right to take the New York Times Company private, together with the Ochs-Sulzberger family.  Today that option seems like a distant dream. What options do the families have? Unfortunately, they are going to have to take some painful measures, including a dividend cut, during this protracted downturn to protect their core franchises. I am certain that coming out of this recession that all newspaper companies, including The New York Times Company, will look very different than they do today. Many of their print assets that are determined not to be core will have been jettisoned and replaced by digital assets that will require a new, less people-intensive content creation model. Media companies that cannot weather the storm will disappear and be replaced by start-ups that are more nimble and have business models that have been tested during this perfect storm.

On January 15th of this year, I wrote of the presidential candidates in both parties who had momentum coming out of Iowa and New Hampshire and those who were trying to regain momentum. At this point, with just over a week to go to the election, it is clear that Senator Obama has momentum and that Senator McCain is still trying to find a message beyond Joe the Plumber. I hold to my earlier prediction that Senator Obama’s momentum will carry him to president-elect Obama, by a wide margin, both in the popular vote and the Electoral College.

The University of Texas, led by Heisman candidate Colt McCoy, and the resurgent University of Alabama, under the able tutelage of Nick Saban, clearly have momentum.  It is a long way until the BCS Championship game, but a match-up between these two storied programs would be outstanding.  I do have to call my good friend Bob Biolchini, CEO of PennWell, to place our annual wager on the upcoming Boston College vs. Notre Dame game that will take place in Chestnut Hill on Saturday, November 8th. Bob and his wife, Fran, were gracious hosts at Del Posto, in New York City, when the Eagles defeated the Irish for the NCAA Hockey Championship earlier this year. With Notre Dame being much improved and Matt Ryan now playing for the Atlanta Falcons, it is a toss-up as to who will host our next dinner. Today’s loss to North Carolina demonstrated again that this is not last season’s team. I will be in the stands rooting for the Eagles!

In closing, I need to bring another winery to your attention. For all of you who love the sensitive Pinot Noir grape, I recommend the reference standard, Williams-Selyem (www.williamsselyem.com). With their extensive offerings and storied history, Williams-Selyem has set the standard for Pinot Noir vineyards in both California and Oregon. Today it is owned by John Dyson, the former lieutenant governor of New York, and his family, who have maintained the high standards of the founders.  Our good friends and neighbors in Blackhawk, Elise and George Riggs, have the most outstanding collection of Williams-Selyem wines, with vintages stretching back into the early ’90s. George had a very long and distinguished career in the newspaper industry and has earned a retirement that includes bike trips throughout the Burgundy region of France and picnics and dinners accompanied by wonderful Williams-Selyem wines.

With all the market volatility and less than three weeks left until the ‘08 Presidential Election, I have decided to move up my Thanksgiving wine column. I considered writing a column on Joe the Plumber, but his 15 minutes of fame will pass quickly. I sense that we all need some diversion from the wild swings in the global markets. I do believe that the recession will be deeper than one would like over the next several quarters, but our British colleagues have shown us a clear path to more stable financial markets with their direct capital investments in the major banks.

I have started receiving my fall orders from my favorite winery mailing lists. What follows are some nuggets:

Abreu Vineyards
The ‘04 Abreu Madrona Ranch Cabernet has been released. Their second growth, the ‘04 Rothwell Hyde Red (I do not understand the branding), is always outstanding. Their olive oil is also worth ordering. www.abreuvineyards.com

Araujo Estate
I always look forward to these excellent Cabernet releases, ‘05 (RP98). www.araujoestatewines.com

Arietta
The ‘06 Quartet is a Bordeaux-style blend included in this fall’s release.  The quartet of grapes is sourced from the famed Lucia Abreu Vineyard on Howell Mountain, with the addition of Cabernet Sauvignon  from the Madrona Vineyard in St. Helena. I tasted the Quartet back in June when I visited with Fritz Hatton and have been looking forward to the arrival of my order. www.arietta-wine.com

Aubert Wines
Mark Aubert has moved from Colgin to Bryant Family Vineyard. For me though, his Aubert Pinot Noirs have quickly become a favorite. I just wish that the quantities were not so limited! www.aubertwines.com

Colgin Cellars
I have served my time on this list and for the first time I have received the ‘05 Cariad release (RP96+). Mark Aubert has been replaced by his former assistant Allison Tauziet. She has been well received by the critics. www.colgincellars.com

Kongsgaard
For all you Chardonnay fans, The Judge ‘06 is a special blend named in honor of John Kongsgaard’s father, who was a judge (RP96-98). www.kongsgaardwine.com

Martinelli Winery
I always look forward to my shipments from Martinelli. I particularly enjoy their Zinfandels. The ‘06 Jackass Vineyard will be included (RP94). They are very complex and full bodied. www.martinelliwinery.com

For those of you who would like to try several of these new releases and do not want to wait to get on the mailing lists, I recommend www.finewinecollector.com.  This Internet business is owned and operated by Edward Mackauf, who is very knowledgeable and has an excellent inventory.

The volatility in world markets remains, one week after the historic votes in the Senate and the House that authorized the rescue plan. It clearly will take time for the global markets to return to normal and it will also take some time for the Federal Reserve and the Treasury to use all the new tools at their disposal.  Almost no one believes that we will escape a global recession. The best we can hope for is that these concerted actions around the globe, including the unprecedented coordinated rate cut yesterday by six of the most powerful central banks, will insure that we do not slide into a global depression. In the United Kingdom, the government has taken ownership positions in several banks to help restore confidence and there is speculation that the United States Treasury will take similar actions with the new authority they have been granted by Congress.

Confidence will be restored and over the next several weeks the world’s credit markets will come back to life. We should realize that global financial markets will be much more regulated than they have been over the past decade. Alan Greenspan’s tenure as head of the Federal Reserve will also be re-evaluated and history will not be kind. With AIG on the brink of collapse several weeks ago, we all started to learn the risks and exposure that unregulated derivatives can cause to even the strongest financial institutions. On Sunday, September 28th, Gretchen Morgenson wrote on the front page of The New York Times, “Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts know as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.”  She goes on to document the rise and fall of AIG’s Financial Products group, run out of London by Joseph J. Cassano, which eventually brought AIG to the brink. Cassano helped start the unit in 1987 and resigned this past February when his unit started hemorrhaging and the auditors started to assess the exposure.  I highly recommend this excellent piece of reporting, “The Reckoning: Behind Insurer’s Crisis, Blind Eye to a Web of Risk,” which demonstrates why good journalism still matters and how fortunate we are to still have the New York Times and not only aggregated news services.

We have also learned that in a time when confidence is essential, proving the theory of “moral hazard” by letting Lehman Brothers go under was a terrible idea. It clearly is the point of demarcation as to why the credit markets froze. If Bernanke and Paulson had coordinated a Bear Stearns/JPMorgan Chase-like solution, we may have avoided all the dislocation that has followed. Once the markets are calm, we will need to study the demise of both Bear Stearns and Lehman Brothers to understand why they collapsed and the best approach to deal with unprecedented financial strains in the global markets.

Finally, with slightly more than three weeks to go until the presidential election and after two presidential debates and one vice presidential debate, the polls are now clearly pointing to the election of Senator Barack Obama as our next president.  Senator McCain has not been able to find a message with which to connect to the American voter and only seems to find his comfort zone when he is dealing with foreign policy issues and war strategies. National defense issues are critical, but this election will be decided on economic issues and the momentum is clearly with Senator Obama. I sense that when the final votes are tabulated that Senator Obama will have won in a landslide that will be reminiscent of the defeat of another Arizona Senator, Barry Goldwater, by Lyndon Johnson in 1964.

On Monday, September 29th, with the whole world watching, the House of Representatives failed to pass the financial rescue plan. After several days of testimony the prior week from Ben Bernanke and Hank Paulson and support from leaders of both parties, the House vote was short by 12 votes. The rescue plan was opposed by 95 Democrats and 133 Republicans. We should not be surprised that George Bush’s capital is spent. He knew he needed the support of both presidential candidates, who returned to Washington DC for a White House briefing on the bill. Senator McCain made a detour first to meet with the House Republicans. Did he wink at them on his way over to the White House, with regard to supporting the bill? It has been reported that while Senator Obama asked several questions about the bill and its impact, Senator McCain, who announced he was suspending his campaign because of the financial crisis, remained silent during the White House meeting. He finally decided on Friday to resume campaigning and showed up on the University of Mississippi Campus for the first of three scheduled presidential debates.  This was only after Senator Obama’s camp made it very clear that he would hold his own town hall meeting if Senator McCain did not find his way to the debate.  Neither senator scored a knockout punch and both seemed more comfortable speaking about issues other than the financial crisis.

One also wonders if the late Speaker of the House, Tip O’Neill, ever went into a critical vote without knowing if he had the votes necessary to pass the bill. Speaker Pelosi decided to make a very partisan speech prior to the vote, which many felt gave the Republican House members the rationale they were looking for to vote against the bill.  The speech would have been more appropriate, if she felt it was necessary, after the vote.

The stock markets around the world reacted immediately  and a blood bath of unprecedented proportions took place as people rushed out of equities to find a safe haven.  On Wednesday the Senate voted on the bill, with some sweeteners,  and passed it 74 to 25, with senators Biden, McCain and Obama all voting for it. Senator Kennedy voiced his support for the bill, but did not leave his home to vote.

The spotlight has once again turned to the House, where they will vote this morning. Will they demonstrate the courage to stare down the Rush Limbaugh audience and move the country forward in a time of crisis?  The credit crisis is very real and each day we see another major bank failing and businesses folding because on top of a slow economy, they cannot survive without access to credit facilities. We are also seeing media deals that were done with significant leverage go into default. Avista Capital’s Minneapolis Star Tribune defaulted on a debt payment yesterday. How many more defaults will we see in the coming weeks? Can any sizable deals get done in the current credit crisis?

We have seen the legendary investor Warren Buffett step in and make two very significant investments in General Electric (GE) and Goldman Sachs (GS). Both deals were done on very favorable terms, but it was clear that the Buffett dividend was still powerful and that he believes these two powerhouses will emerge from the current crisis in even stronger positions. I once had the pleasure of sitting next to Warren Buffett at a dinner, right after the merger of Capital Cities and ABC. It was during a senior management meeting in Phoenix and he had just provided the $500M that allowed Capital Cities, the smaller company, to acquire ABC. His words of wisdom, with regards to investing or acquiring simple businesses where you could quickly understand how you made money, have always stayed with me. He also had ample praise for the management team of Tom Murphy and Dan Burke. He likes to bet on strong franchises with excellent management.

While we waited for the House to vote again, we got to watch Senator Biden and Governor Palin debate last evening. This was their first meeting and was the only scheduled debate between the two vice presidential candidates. Governor Palin did not need a “life line”  (from Tina Fey on Saturday Night Live), but it was clear that well-rehearsed lines could not carry the day against a very experienced senator.  My views expressed in my earlier blog entry, Leadership, remain intact.

While the world’s financial markets are frozen and we are seeing the foundations of our financial system shaken, the post-season playoffs have returned for our National Pastime.  After making the playoffs for 12 straight years under Joe Torre’s leadership, the Yankees did not make the cut. The American League wild card was won by the Red Sox. Torre’s record remains intact, though, as he leads the Los Angeles Dodgers into the post-season for the first time in many years. He had a great assist from Manny Ramirez, who the Red Sox traded during the summer after it was clear that he needed a new home.  The Mets had another late-season collapse, and while it did not match their ‘07 collapse, it was still very painful for Mets fans. The playoffs did open with both Chicago and Los Angeles having two teams in the hunt.

Chicago is a great sports town and there was euphoria, for a short time, having both the Cubbies and the White Sox in the post-season playoffs. This was the first time since 1906 that both teams were in the playoffs in the same season. The euphoria was short-lived, however, as Joe Torre’s Dodgers have taken a 2-0 lead over Lou Piniella’s Cubs. Piniella led the Cubs to 97 wins, for the best winning percentage in the National League, but they have their backs to the wall as they travel to Los Angeles in a short best–out-of-five series.  Will the World Series drought that stretches back to 1908 continue for the Cubs? The White Sox find themselves down 1-0 to the surprising Tampa Bay team.

The Cubs’ current owners, the Tribune (a sale process is progressing), are facing their own uphill battle. Under Sam Zell’s leadership, will the Tribune be able to avoid default later in the year, as the newspaper industry continues to see eroding advertising revenue?