NY Times Financing Deal Brings Expensive, Temporary Relief

The New York Times Co.'s (NYT) financing deal with Mexican billionaire Carlos Slim will allow it to better manage its debt load this year, but the arrangement also means higher borrowing costs amid a severe revenue slump for the publisher, raising the risks of severe cost-cutting measures if its financial performance continues to weaken.

The embattled newspaper publisher raised $250 million from Slim in return for 10-year notes with warrants that can be converted into 15.9 million common shares at a strike price of $6.36. The cash will be used by the company to pay off $100 million in bonds due in November and pay down some portion of $400 million in debt it has drawn down from two $400 million revolving credit facilities - one due in May and the other in June 2011.

Catherine Mathis, a Times Co. spokeswoman, said the company could roll over all of its revolving credit debt in May without paying any of it down, but it will use $150 million from its deal with Slim to avoid maxing out its revolving credit line.

The company will pay a steep 14% interest rate on its loan from Slim, and Wachovia analyst John Janedis said that will increase the Times' borrowing costs this year by $21.9 million, or 9 cents a share, even as it struggles to cut costs without damaging the editorial quality of its products.

Janedis said the deal signals the company's "desire to lock in funding ahead of a much weaker 2009 where financing costs could go even higher."

New York Times shares recently fell 41 cents, or 6.4%, to $5.98. The stock hasn't closed below the $6 mark since Nov. 21.

Like other newspaper publishers, Times Co. was struggling with shrinking revenue and profits and a falling stock price long before the global financial crisis took hold on Wall Street last year. Print news audiences are rapidly shifting to the Internet, where content is free and advertising is far less lucrative, pressuring publishers to pare down their news-gathering operations.

Already vulnerable, newspapers have been hammered by the credit crisis and economic downturn, especially those with heavy debt loads, like Tribune Co., which recently filed for bankruptcy protection.

Times Co., which will report its fourth-quarter earnings results next Wednesday, had about $46 million in cash and $1.1 billion in debt at the end of September. Meanwhile, its stock has dropped nearly 50% in the past three months, compared with a 10% drop in the Standard & Poor's 500-stock index, and its debt is rated as "junk" by S&P.

In the first three months of 2008, Times Co. generated $183.2 million in cash flow from operations, down 38% from the year-ago period. If the advertising market rebounds and its cash flows stabilize, the company could wind up looking like a cheap investment. But if the ongoing declines continue, the company could be forced into more dramatic cost cuts to meet its obligations.

In recognition of its precarious position, New York Times cut its dividend by 75% in November, reducing the annual payout to its controlling family - the Ochs-Sulzbergers - to less than $7 million from about $25 million. The move could test the family's steadfast commitment to its newspapers as economic pressures squeeze profits. In the third quarter, Times Co. posted net income of $6.5 million, down 51% from a year earlier. Its monthly revenue declines accelerated in the fourth quarter.

Times Co. is in the process of raising $225 million in a sale-leaseback deal for a portion of its Manhattan headquarters. Mathis declined to comment on the process. It recently began selling ads on the front-page of its flagship newspaper, it has consolidated some printing plants and it's exploring the sale of some assets, like its stake in the Boston Red Sox major league baseball team.

Barry Lucas, analyst with Gabelli & Co., said conditions in the credit markets probably need to improve before the publisher is able to sell assets.

"The current financing indicates that improvements are not forthcoming," said Lucas.

A spokesman for Slim, who bought a 6.4% stake in Times Co. in September, declined to comment on the deal. The owner of Telefonos de Mexico SAB (TMX), or Telmex, Mexico's former telephone monopoly, and America Movil SA (AMOV), Latin America's largest cellphone firm by subscribers, could increase his stake in the company to 18% if he exercises the warrants, which expire in January 2015. That would make him the second-largest outside shareholder behind hedge fund Harbinger Capital Partners, which owns a 20% stake in the company and won three board seats at the publisher by threatening a proxy fight last year.

A spokesman for Harbinger declined to comment.

-By Nat Worden, Dow Jones Newswires; 201-938-5216; [e-mail]

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