Filed under: Deals, Marketing and advertising, Private equity, New York Times’A’ (NYT), News Corp’B’ (NWS)
Fortune and BusinessWeek are piling on the story of Harbinger Capital Partners, a $19 billion hedge fund, seeking to take over the New York Times (NYSE: NYT). Harbinger now owns 19% of its Class A shares. Of course, Harbinger is not the only threat to management of the Times — News Corp.’s (NYSE: NWS) Rupert Murdoch is doing his part as well. Will Steve Rattner, a long-time friend of Times publisher Arthur Sulzberger and Managing Principal of Quadrangle Group, come to the rescue and take the Times private?
In play here are Phillip Falcone, a Harbinger partner who made $1.7 billion last year, and the quaint idea of protecting a media company’s founding family by maintaining two classes of stock: Class A for the public to make insiders liquid and Class B for the insiders. Murdoch and Sulzberger enjoy protection for their family dynasties thanks to that two-tiered structure.
Falcone thinks that the Times is leaving massive amounts of money on the table by not “monetizing” all the comments on its stories. What sparked this idea was a January view piece by Caroline Kennedy comparing Barack Obama with her dad, President John F. Kennedy. There were only a few comments about the article on the newspaper’s Web site, nytimes.com, but there were hundreds on Huffington Post and Digg.com. BusinessWeek quotes Scott Galloway, founder of hedge fund Firebrand Partners and Falcone friend who said: “We came to the collective conclusion that there was so much upside in terms of billions of pages the paper wasn’t monetizing. He [Falcone] never looked back.”
Falcone recently got two of his allies onto the Times’ board. How did he do it? This January, with the stock trading at $15, Falcone purchased a 4.9% of the publicly traded Class A shares for $105 million over several weeks. (The Class B shares are held privately by the extended Sulzberger family, allowing them to retain control of the company.) Falcone and Galloway swiftly launched a proxy assault, pushing the Times board to add four of their picks as directors. They only backed down in March when the Times concurred to accept two of the nominees for its 15 person board.
If the Times was doing well financially it might not be so vulnerable. Earlier this month, the Times reported that it lost $335,000 in the first-quarter 2008 in a performance that fell far short of both analysts’ expectations and its $23.9 million profit in the 2007 quarter. Its newspaper and on the internet advertising revenues were down 10.6% and digital advertising growth slowed to 16% from 21.6% a year earlier.
Last year newspaper industry ad revenue fell 8% while the Times’ ad revenue fell 4.7%. So it looks like the industry and the Times are doing worse. And its stock has fallen 15% in the last year. Even though since Harbinger purchased in, the stock has risen 33% to $20.58.
Nevertheless, the Times is under siege and it could use a savior. Will Rattner ride to Sulzberger’s rescue? Rattner is a former Times reporter and Lazard Ltd. (NYSE: LAZ) executive who now runs the $6 billion Quadrangle Group. Vanity Fair reported that Rattner, who raises money for Hillary Clinton, persuaded Sulzberger to endorse Clinton — overruling the Times editorial board.
I don’t think Falcone will be able to reverse what ails the Times with his plan for digital advertising — there’s just not enough revenue there. But he’s already made a nice profit on his shares. Meanwhile, Rattner appears to be the only source of capital who would protect the Sulzberger family in a going private transaction. But I don’t know if the banks have an appetite now for such a deal.
I don’t know what will happen next but it seems clear to me that the Times needs a change in management if it’s going to remain a viable business.
Peter Cohan is President of Peter S. Cohan & Associates. He also instructs management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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