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Business

Grim forecast made for Block newspapers

Joe Napsha
| Friday, Dec. 29, 2006

Even if unions at the Pittsburgh Post-Gazette and its sister paper in Ohio agree to contract concessions, the papers might be sold if losses from weak advertising and circulation are greater than cost savings, a credit rating service said.

The outlook was offered by Standard & Poor's, New York, in a report that downgraded the credit rating of Block Communications Inc., parent company of the Post-Gazette and The Blade in Toledo.

Moody's Investor Service, another ratings firm, downgraded Block's credit rating because of high debt, higher than expected losses at its two newspapers and uncertainty over labor negotiations, according to a report this month.

Block, based in a Toledo suburb, has threatened to sell both papers if it does not win contract concessions to stem the losses.

Allan Block, chairman of Block Communications, could not be reached for comment.

The threat of selling the Post-Gazette and The Blade comes at a time when large-city newspapers are losing advertising revenue, largely due to the consolidation of department stores, said John Morton, a newspaper industry analyst in Silver Spring, Md.

"Newspapers have become the equivalent of commodities, trading around like pork bellies," Morton said.

While Moody's would not estimate the value of the Post-Gazette and Blade, newspapers companies typically sell for higher levels based on the cash they generate than other types of companies, said Mark Gray, a Moody's analyst.

"There's always a local interest -- someone ... who wants to control the editorial content," Gray said of the attraction of newspapers to potential buyers.

But not all big-city newspapers are holding their value. The McClatchy Co. this week sold the Star-Tribune of Minneapolis for $530 million, less than one-half the $1.2 billion it paid for the paper eight years ago. McClatchy benefited from a $160 million tax break.

The buyer was Avista Capital Partners, a New York private equity firm. The deal was Avista's first newspaper purchase, although it was widely reported to have shown an interest in the two Philadelphia newspapers that were sold earlier this year. With the boom in acquisitions of all kinds by private equity firms this year, such a buyer could take a look at the Post-Gazette and The Blade.

The Post-Gazette said earlier this month it is on track to lose about $20 million this year, but its losses could be as high as $25 million. The paper said in September it has lost $23 million since 2003.

Block's publishing business is losing money even though it benefits from having the dominant paper in its markets, Moody's said. The two Block newspapers historically have had low single-digit profit margins, well below industry averages, Standard & Poor's said.

Block's management has indicated it would consider a sale of its newspapers if its cost objectives were not reached in labor negotiations, or if continued weak advertising and circulation trends were to overwhelm any cost savings, Standard & Poor's said.

"Moody's expects the (Block) publishing segments to continue to burn cash until significant revisions are made to the union contracts," Moody's analysts wrote. Contract concessions are needed to improve results, it said. Block derives about 58 percent of its revenue from its newspapers, 29 percent from cable TV and 8 percent from its TV stations, Moody's said.

Block Communications carried $275 million in debt as of Sept. 30, according to Standard & Poor's, which last month slightly downgraded the company's credit ratings from B+ stable to B+, putting it on a credit watch list, with the likelihood of being downgraded further.

Moody's downgraded Block's corporate rating and probability of default rating from Ba3 to B1, warning investors the debt is subject to a high credit risk. Such ratings tell investors the likelihood of debt being repaid.

While uncertainty remains over contract negotiations between the Post-Gazette and 14 bargaining units representing about 1,100 employees, the two sides have agreed to an extension of the Dec. 31 deadline. Unions have said they are willing to work with the Post-Gazette to make it profitable but have balked at the company's demands for changes in longstanding work rules.

The contract dispute at The Blade, where pacts expired in March, has evolved into a bitter battle because management locked out about 215 workers from five unions when its contract offers were not accepted this summer.

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