Of news and papers

In my post at the turn of the year (“Five worst industries for 2009”) I took a quick stab at some of the issues confronting newspaper publishers. To summarize, news isn’t going anywhere (with qualifications), but paper certainly is. The news component of newspapers is still valuable; content is valuable. As soon as content providers figure out how best to package that content and sell it – that is, as soon as they strike upon the best business model going forward – they should do okay. Those that can’t figure that out – or those that have no real content that anyone wants buy – will perish.

Long term, The New York Times Co., Thomson Reuters, Dow Jones, Gannett, Financial Times…these large business are all playing the same game. They have large-scale news-gathering skills, and it matters little how they package them. People will continue to pay for the information, whether that means buying a newspaper (less likely) or tapping into an RSS feed (more likely).

The Seattle Post-Intelligencer and similar regional papers – that is, papers that are regional and perhaps not even the #1 paper in their market – will find the going too tough and will cease publication. Other regional papers, although stressed by the current confluence of declining ad revenue and declining circulation, will probably stumble through. After all, strong regional franchises can be valuable, too. Think of the Atlanta Journal Constitution, the Arizona Republic, the San Francisco Chronicle, and so on. But these regional papers must get with the program regarding digital media, no less than their national rivals.

If that’s the “news” side of the equation, what about the “paper” side?

There, from a business standpoint, the story is just as interesting, and just as perilous. Take the misadventures of AbitibiBowater Inc. (NYSE:ABH). Abitibi-Consolidated Inc. and Bowater Incorporated merged in 2007 just as the bloom was coming off the rose for the pulp and paper industry. Proxy advisory firms Institutional Shareholder Services Inc. and Glass Lewis & Co. gave a glowing review of the merger to the companies’ shareholders, claiming that “The combined company will become the third largest paper and forest product company in North America and the resulting scale will afford AbitibiBowater substantial costs savings.”

Of course, this rationale provided by the companies and their advisors never really panned out. Just a month prior to the statement quoted above, Standard & Poor’s downgraded both companies. At the time, Abitibi shares traded at around $50 – today, AbitibiBowater Inc. closed the session at $0.85 (a decline of over 98% and a market cap under $50 million!) and is facing a possible delisting. Both Abitibi and Bowater debt trade at huge discounts. Remember, folks, this is one of the largest providers of newsprint in North America.

The cost-savings that were supposed to have benefited the combined company have been negated (and then some) by the fast and furious shrinkage in demand for the company’s products. Simply put, the company can’t downsize fast enough. It is currently shedding assets as fast it reasonably can in order to pay off debt that will mature this spring and summer, but really, when it comes to the core business, who wants to buy the underlying assets? They’re practically worthless. Given that the whole industry waited far too long to downsize, I imagine that ABH isn’t the only company looking to dump its assets. Indeed, overcapacity is one reason companies left standing in the industry are finding it so hard to turn a buck.

More likely, AbitibiBowater will need to roll over and refinance a good portion of the debt coming due. According to a Reuters report, both Abitibi and Bowater business units have assets to cover the maturing debt, but finding a buyer in this market, even at fire sale prices, is going to be extremely difficult. A wise lender would recognize that and try to wait it out along with their borrowers.

But a wise lender would also push the company to improve upon some of the industry’s worst margins. From glancing at the relevant data, the company has actually improved its market share, but has done so at the expense of the bottom line, and so long as leading companies refuse to adapt supply to dwindling demand, profitability is going to a really difficult thing. The whole industry, then, is in a game of Russian roulette, with each major player hoping to take their turn with the chamber empty.

Speaking in the aforementioned report from Reuters, credit analyst Rahul Gandhi spells out the future for AbitibiBowater:

“Abitibi and Bowater have bonds due in August of this year and they have a whole set of even larger maturities due in 2010 and it doesn’t look like this company is in fair shape to survive all these…Their cash flows have certainly improved on a sequential basis and they will continue to improve at least for the fourth quarter, but newsprint, like most other paper products, is looking pretty weak going into 2009.”