Should A.H. Bello sell the Dallas Morning News?

D Magazine, Jan 01, 1999

In 1997 the venerable Harte-Hanks newspaper chain did the unthinkable: The company sold its newspapers, including the award-winning Corpus Christi Caller-Times. Harte-Hanks divested its founders' stake to focus on the newspapers' shopper and direct marketing spinoffs, which showed more earnings potential than the papers themselves. As Christopher Harte, grandson of a founder and member of the Harte-Hanks board, explained privately when the sale was announced, "There wasn't much to the decision. The other divisions were too profitable, and the multiples for newspapers were too high. It was time to sell."

In his flat practicality, Harte sounds a lot like fellow Texas newspaper family scion Robert Decherd, chairman of A. H. Belo Corp. (BLC), who last year told Forbes, "I'm a Darwinist. Only the strong survive, and they get stronger in adverse economic conditions."

Decherd now has an opportunity to prove his theory. Of the 29 major media stocks followed by Media Industry Newsletter, Belo--through October--had racked up the worst performance of the year, with a 47 percent decline in value.

Belo's poor performance has been surprising to many outside observers, including longtime stockholders, because it's actually a very strong company. Although readers in Dallas and Rhode Island may think of it as a newspaper company because of the high visibility of the News and the Providence Journal, Belo's primary business is broadcasting, and in the past few years it has transformed itself into the third-largest independent broadcaster in the nation. It now owns 17 network-affiliated television stations and three local cable companies while managing four other stations, what Salomon Smith Barney analyst Paul Sweeney calls "a very high-quality collection of assets." Almost all the TV stations rank No. 1 or 2 in their markets.

Belo's concentration on broadcasting is so focused, say insiders, that when it bought the Providence Journal Company for $1.8 billion in 1997, it didn't even bother to go through the usual due diligence scrutiny of the company's publishing properties. Its attention was trained instead on the company's nine TV stations, all located in high growth markets such as Seattle.

Belo's growth and its broadcasting strategy have been financed in the past by the News, which for nearly a decade has been a huge cash cow. But in recent years the cash cow has been showing signs of wear and tear. The question investors and employees alike are asking is, has it been milked for all it's worth?

In 1981 A. H. Belo went public with revenues of $182 million, primarily from the News and WFAA-TV (Channel 8). Its initial public offering not only bought out several distant cousins of the reigning Dealey-Decherd-Moroney families but also raised $25 million in cash. In 1994 the company made its first big acquisition, buying four TV stations from Dun & Bradstreet. But the real action in the '80s was in Dallas, where Belo was locked in a fierce competition with Times-Mirror, owner of the Dallas Times Herald. It was literally a battle for survival, and Belo threw everything it had into the fight, recruiting talented editors and journalists, redesigning and updating the newspaper, and spending millions marketing dollars.

In 1991, the Times Herald (then under different owners) conceded defeat. Almost immediately the News, now a monopoly in one of the nation's largest markets, jacked up advertising rates. By the end of 1997, stock in Belo, which sold for $10.53 a share in 1984, reached a high of $56.13. But by the end of 1998 (and after a two-for-one split in June), the stock price had dropped 40 percent in value; at press time, it was hovering in the $18 range.

What went wrong? 1999 started on a high note, with Belo's CFO, Michael Perry, projecting that the company's net flow and after-tax cash flow for the previous year should "handily exceed" Wall Street estimates. But ad revenue, particularly in the high-tech job classifieds, started drying up. The first inkling something at Belo was seriously amiss came in June, when Perry abruptly resigned. "Perry had overestimated revenues by $600 million," says one News reporter. "They found out in March and got rid of him, but they didn't tell Wall Street. They committed a classic mistake--letting investors expect more--and got punished." (Perry, reached in San Mateo, Calif., refused to comment.)

Perry's resignation led investors to take a more jaundiced view of other potential problems, among them substantial debt from the Providence Journal Co. acquisition, purchase of expensive new TV newsroom computer technology, implementation of high-definition TV signals at two stations, and reported cost overruns on the company's new Texas Cable News, a 24-hour regional news channel with an estimated capital expenditure of $15 million. In addition, the company has spent millions in its foray into the Star-Telegram's Tarrant County territory with the ersatz Arlington Morning News, an investment that shows no signs of ever producing a return.