Belo Splits in Two: So Long, Synergy?

Why would Belo, a smallish newspaper company with a stable of strong, big-city television stations, split itself into two even smaller public companies, as just announced?  Let’s count some of the likely reasons.

Start with the obvious: A structural move like this aims to please Wall Street.  In fact, analysts and investment fund managers have been urging Belo to consider breaking up the company for most of this year.  The market responded by bidding Belo stock (still including both businesses for the six months it will take to complete the transaction) up by nearly 20 percent.

It is old news by now that reverses in newspaper earnings and poor short-term prospects have dragged down share prices dramatically.  The split takes that burden off the television group.  Another plus is that there are few public companies exclusively in the local television business, and this move makes Belo the biggest.  So the action will give those who would like local TV in their portfolio a so-called "pure play" opportunity to buy.

On the newspaper side, earning issues will follow along, so don’t look for the new A.H. Belo to take off like a rocket.  But there are several potential pluses.  Chief executive officer Robert Decherd elected to stay with the newspaper half of the enterprise (Chief operating officer Dunia Shive will run the TV group, which will operate under the Belo Corp. name).  Decherd’s choice by itself implies commitment to building and rebuilding the newspaper franchise built around The Dallas Morning News.

A significant detail is that the transaction is being structured so that the newspaper company has no debt.  One of the drags on Belo's and other companies' stock price has been skepticism in the financial community about whether depleted earning can cover the interest expense on debt without further cutting that will weaken the core business.  In this week's announcement, Decherd suggested that difference could make Belo a newspaper stock of choice.

The reorganization also offers the newspaper group additional flexibility down the road.  Should circumstances warrant, the group could more easily convert from public to private ownership, borrowing if need be.  As part of such a plan or separately it  might sell The Providence Journal or The (Riverside, Calif.) Press Enterprise and plow the proceeds back into the Morning News and its growing online operations.

I also take the action as a declaration, consistent with Decherd’s most recent presentations to investors, that a newspaper company these days comprises a retrenching print product, a fast-growing online presence (the focus of most internal investments) and appropriate specialized publications.  Belo was early to the party in Spanish-language publications in both Dallas and Riverside.  Glbert Bailon, editor publisher of Al Dia in Dallas, is the current president of the American Society of Newspaper Editors.

The Belo announcement alludes to "profound and distinctive changes" going on in the newspaper and local television businesses.  I read that to mean that the two are now on separate paths and that online is part of the future for stations but hardly the center of the new business model as it has become for newspapers.

You might also infer that Belo is bringing down the curtain on the alleged "synergies" between television and newspaper operations.  A decade ago, this was a centerpiece strategy for Tribune and other companies.  Belo was touting the benefits of sharing news and other resources as recently as 2006 in its presentations to investors.

However, joint ownership (except where it is grandfathered in existing arrangements) has yet to win Federal Communication Commission approval and may never.  Also, except for the benefits of cross-promotion, there is not much of a case that these combinations strengthen the respective businesses. Advertising sales cultures in the television and newspaper business do not appear to mix; combining them, 2 + 2  equals 4 not 5.

Belo has been assiduous in arranging content sharing between the Morning News and its Texas stations in Dallas, Houston and Austin, and in markets like Charlotte where it owns a television station and is partnered with an unaffiliated newspaper.

It is hard to say for sure today, but as the split plays out, there seems no reason that kind of content-sharing could not be reconstituted as a contract partnership if it still makes sense.

Already the action has financial analysts renewing the suggestion that Media General, another small company with roughly equal revenues from its newspaper and television divisions, should consider splitting itself in the same way.  The question has been raised for the big guys too, Gannett and Tribune, while the latter was in play before a sale agreement for the whole company to a private group headed by Sam Zell.  What exactly is gained by having both business under one roof and one management group? 

The Belo action is no panacea.  Internet competition, eating away at all categories of lucrative classified advertising, will be the same tomorrow as yesterday.  But it is nice to see a newspaper company’s top management dealing with one specific problem –- in this case being in Wall Street's doghouse -– ingeniously and with decisive action.

Decherd has been a leader in putting together a large group of newspapers in partnership with Yahoo.  This week's announcement mentioned benefits likely to kick in when full capacity to place ads kicks in during 2008.  Top analyst Paul Ginocchio of Deutsche Bank Securities, wrote in a recent report that the Yahoo deal is likely to give participating companies the significant advertising revenue boost that has been absent in recent years.

I happened to be talking last week with Robert Mong, Dallas Morning News editor, about cuts and coverage priorities.  He was regretful but hardly ground down by what the paper has been forced to eliminate.  The cuts came in big waves in 2002 and 2006, so the paper has moved on now to rebuilding and some modest rehiring.  Mong said that means investing in "centers of excellence" like education and letting some other elements of the operation make do with less -- including certain specialty topics and more-distant geographic areas that got lots of attention in the glory days of the 1980s and 1990s.

So mark down the spinoff and the new A.H. Belo company as a hopeful indicator that newspapers (with a multiplatform strategy in place) do have a future and merit the singular focus they will receive in Dallas once the transaction is completed.

(A Belo spokesman did not immediately respond to a request for an interview with Decherd yesterday afternoon.  Companies typically go into a "quiet period" in the interim between the announcement and completion of a deal).


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