Does the Sun Times Media Group have value? Or even a future?

August 12, 2009

Earlier this week I took a close look at Creative Loafing’s bankruptcy filings to try and figure out how much that company – and by extension – the Chicago Reader is worth. Here I’ll try to peer into the much more complex bankruptcy filings of the Sun Times’ parent company, the Sun Times Media Group, to try and figure out the worth of the Sun Times as it struggles through bankruptcy and tries to find a buyer.

There are some big differences between the Sun Times Media Group (STMG) and Creative Loafing. According to the press release that accompanied its bankruptcy filing, STMG has 59 publications, including multiple dailies, weeklies, shoppers and websites. Also, unlike Creative Loafing, the majority of STMG’s debt does not come from private creditors, but from unpaid federal taxes.

Bankruptcy proceedings can usually be characterized as a fight between creditors over who gets paid first and how much of the sale price or liquidation proceeds goes to who. All this changes when Big Daddy – the Internal Revenue Service – shows up, because federal law says the tax man gets first bite in a bankruptcy, and they don’t have to negotiate with anybody. Also, if the IRS wants, it can choose to take nothing for now, and force any future STMG owner to pay tax debt over time through a lien. 
So really, STMG’s bankruptcy is a public sideshow to the more important, private negotiations STMG is likely conducting with the IRS. At best STMG is hoping the bankruptcy judge will provide some shelter from zealous IRS attorneys who may want to squeeze every last dime out – or worse, shut down the whole company.
With this Sword of Damocles hanging over STMG’s – and any potential buyer’s – head, placing a monetary value on the Sun Times is very, very difficult. But let’s try anyway.
First, let’s see what information we can find.
According to STMG’s March 31 filing, as of November 7, 2008, the paper had a book value of $479 million and $801 million of debts – $608 million of that is to the Internal Revenue Service (page 15) .
Things get even hairier when you look at STMG’s operating income (page 51):

2007 –    ($46,745,434)
2008 –    ($17,073,676)
2009Q1 – ($5,852,346)

Unless something changes, it looks like STMG is on pace to lose another $23.2 million this year.
Now the really grim news – even though STMG has $479 million in assets, the vast majority of that is equity investments in other companies – as of June 1, 2009 (page 13), it only had about $10.9 million in cash, barely enough to keep operations moving. If we extrapolate the 2009Q1 losses by month, that means in just over 5 months – November – STMG’s cash reserves will be completely dry.
In short, without a buyer, new investors, or shutting down significant portions of the company, we can count on all of STMG closing down before the end of 2009. Under these circumstances, it is hard to see that STMG as a whole has any sale value – running any valuation is pointless since any buyer would have to immediately inject new cash into the company just to keep it afloat. 
Individual Components

STMG is a holding company comprised of dozens of smaller businesses. Its bankruptcy filings do not shed much light on the individual businesses’ operations, nor do the Security and Exchange Commission (SEC) filings from when the company was still solvent. But, since we know that STMG as a whole has problems, let’s try to tease out how the parts of the company are doing.
First, take a look at operating revenue (proceeds before expenses) of the company as a whole:

(in thousands)
2006 – $420,379 
2007 – $372,258
2008 – $323,850

Clearly the company’s revenues are not improving. In fact the 2008 10-K report paints a pretty grim picture:

…the use of alternative means of delivery, such as free Internet sites, for news, advertising and 
other content has increased significantly in the past few years and has resulted in what may likely be permanent 
decline in advertising revenue for printed newspaper products. Should significant numbers of customers choose to 
receive content using these alternative delivery sources rather than the Company’s newspapers, the Company may 
suffer continued decreases in advertising revenue and may be forced to decrease the prices charged for the 
Company’s newspapers, make other changes in the way the Company operates or face a long-term decline in 
circulation, any or all of which are likely to harm the Company’s results of operations and financial condition. 

Since STMG does not disclose revenue or expenses for individual publications, let’s take a peek at circulation numbers of its daily newspapers, found in the 20062007 and 2008 10-K reports. 
Clearly the Sun Times is faring the worst of the publications, with the highest annual percentage losses, while the three biggest suburban papers, the SouthtownStarHerald News and Post-Tribune have mostly stable circulations.  Although we don’t know how much in administrative costs are saved by making the suburban papers part of STMG, nor do we know how being part of an ad network with the Sun Times brings in more money, it seems like a safe bet that the suburban papers are propping up the big city daily to some extent.
It’s probably a good assumption that where the readers go, so go the advertisers. As an outside observer, with the incomplete information derived from regulatory and court filings, it would seem that if anything were to survive STMG’s November cash crunch, it would be the suburban papers.
What Next?
The next court date for STMG’s bankruptcy is on August 19, and then there are hearings set once a month. I’m not an attorney, but I’m guessing that as the company’s cash holdings deplete, each hearing will ratchet up the pressure on all parties – the IRS, private creditors, STMG, to find a solution. Without a deep-pocketed buyer, STMG may be forced to close down the Sun Times, sell off the suburban papers, radically reduce staff, turn the Sun Times into an on-line only paper like the Seattle Post-Intelligencer or some combination of all those solutions. 
Either way, it seems almost guaranteed that come 2010, Chicago will see a significantly reduced news presence.